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OUTLINES OF ECONOMICS 



A 'Syllabus for Introductory Study ^ 






by 
HERBERT ELMER MILLS, Ph. D. 



PART L 



POUGHKEEPSIE, N. Y. 
1906 



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LIBRARY of CONGRESS 

Two CopiM Receivid 

SEP 25 1906 

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Copyright, igo6, 
Herbert Elmer Mii,i,s. 



ENTERPRISE PRINT, POCGHKEEPSIE, N. Y. 



From the time of its first publication, fourteen years ago, 
Professor Marshall's Economics of Industry has been used in 
this Department with great satisfaction. Within the last few 
years, however, several excellent text-books by American 
authors have appeared. Each of these has its own points of 
superiority and deals v/ith topics not included by Professor 
Marshall in his presentation. These Outlines have been pre- 
pared with the intent of guiding the student in using these 
several books and of making available in unified, systematic 
form the particular excellencies of the different books. They 
are in no sense a substitute for text-books. Each student 
must have for constant use Marshall's Economics of Industry, 
^Qdigev^s Ijztroduction to Economics, and Seligman's Principles 
of Econo7?iics. Other very desirable books are Bullock's hiiro- 
duction to the Study of Economics, Fetter's Principles of Eco- 
nomics, Gide's Principles of Political Economy (2nd Amer. 
ed.), and Mill's Principles of Political Economy. 

Lectures to the class will follow these Outlines. At the 
meetings in sections each student will be held responsible for 
fuller treatment of points indicated in the Outlijies ; for argu- 
mentative discussion of debatable questions ; and for constant 
illustration based on reading and personal observation. It is 
hoped that note taking during the lecture hour will be found 
unnecessary. Grasp of the thought, reflection and application 
are more desirable than voluminous but unassimilated notes. 

Part II. will take up Money, Banking and Credit, American 
Monetary History, Foreign Exchange, Securities, Investment, 
Speculation, International Trade. 



Department of Economics, 

Vassar College, 

September, iqo6. 



Outlines of Economics. 



CHAPTER I. 
INTRODUCTORY. 

I. Definition, Scope and Scientific Cliaracter of Economics. 

a. Definitions used at different periods of economic study- 
reveal the change in its character. 

Adam Smith, 1776 : Inquiry into the Nature and Causes 
of the Wealth of Nations. 

Nassau Wm. Senior, 1836 : '' The science which treats of 
the nature, the production and the distribution of wealth." 

John Stuart Mill, 1848 : " Writers on Political Economy 
profess to teach, or to investigate, the nature of Wealth, and 
the laws of its production and distribution." 

Wilhelm Roscher, 1854 : " The starting point as well as 
the object point of our science is Man." 

Luigi Cossa, 1877 : '' The science of the social ordering 
of wealth." 

Henry C. Adams, 1886: "Political Economy treats of 
industrial society." 

J. N. Keynes, 1890: " The science which treats of the 
phenomena arising out of the economic activities of mankind 
in society." 

Alfred Marshall, 1900 : " Economics is the study of man's 
actions in the ordinary business of life." 

Cossa, Introduction to Political Economy, pp. 58-65 ; Ely, Out- 
lines of Economics, Bk. I., ch. 11 ; Keynes, Scope and Method of 
Political Economy, ch. 3 ; Seligtnan, Principles, § 2. 



6 Introductory. 

b. " ' Money,' or ' general purchasing power ' or ' command 
over wealth ' is the center around which economic science 
clusters ; this is so, not because money or material wealth is 
regarded as the main aim of human effort, nor even as afford- 
ing the main subject-matter for the economist, but because 
in this world of ours it is the one convenient means of measur- 
ing human motive on a large scale, ' ' 

Marshall, Principles of Economics, Bk. I., ch. 5 ; Marshall, 
Economics of hidustry , Bk. I., ch. 3. 

c. Not all subjects of study are sciences. The character- 
istics of the sciences are ability to classify facts or phenomena 
in orderly arrangement ; and to establish relations of sequence 
or cause among them. From these follows some possibility 
of prediction. Sciences have these characteristics in very 
different degrees — some being very exact and precise as as- 
tronomy and physics, while others are inexact or incomplete 
as meteorology and the science of the tides. 

In spite of the apparent freedom of the individual will, 
human actions are capable of scientific study, and, when 
masses are considered, of comparatively accurate prediction. 
The social sciences are incomplete and in many respects very 
inexact ; but, because of the more accurate measure it 
possesses, Economics is more exact than the others. 

Economics aims to discover truth and must be distinguished 
as a science from statesmanship, philanthropy, social reform 
which as arts endeavor, on the basis of the truth discovered 
by Economics and other sciences, to accomplish results. 

Marshall, Principles, Bk. I., chs. 5, 6, passim; Marshall, 
Economics of Industry, Bk. I., ch. 5, §§ 1-4; Gide, Principles of 
Political Economy, 2d ed., pp. 1-7; Cossa, Introduction, pp. 40- 
57; Davenport, Outlines of Economic Jheory, pp. 1-7; Fetter, 
Principles of Economics, ch. i, § 3 ; Keyues, Scope and J\Iet/wd, 
chs. 1-3; Walker, Political Economy, 3rd ed., pp. 17-23; Selig- 
man. Principles, § 14 ; Cairues, Political Econoviy : its Character 
and Logical Method, pp. 25-42. 



Introductory. 7 

2. Economic Law and Method. 

Economic laws are statements that certain action may be 
expected under certain conditions from the members of a 
social group in lines of conduct in which the strength of the 
motives chiefly concerned can be measured by a money price. 

Like most other sciences Economics uses both induction 
and deduction in discovering its laws. 

Marshall, Principles, Bk. I., ch. 6 ; Marshall, Economics of In- 
dustry, Bk. I., ch. 4, § 5 and Appendix A ; Seligman, Principles, 
§ lo ; Cossa, Introduction, pp. 67-92; Gide, Principles, Bk. I., 
ch. 4 ; Keynes, Scope and Method, chs. 6, 7 ; Nicholson, Princi- 
ples of Political Economy, Vol. I., pp. iS-20 ; Seager, Introduc- 
tion to Economics, §§ 31, 32 ; Hadley, Economics, pp. 23-25 ; 
Cairnes. Political Eco7iomy : its Character and Logical Method, 
L,ecture III. 

3. Relation of Economics to otlier Subjects of Study. 

Economics and the other social sciences are closely related 
and mutually dependent. Even when we endeavor to decide 
the appropriate course of social action in lines in which the 
motives are mainly economic and in which accordingly 
economic laws will be our chief guide, we get suggestion or 
definite instruction from History, Psychology, Sociology, 
Law, Politics, Statistics, Finance and other studies which 
deal with man individually or socially. But Economics 
having its own special field of investigation should be 
discriminated from all these other subjects. 

Cossa, Introduction, pp. 23-39; Seligman, Principles, §§ 12, 13 ; 
Seager, Introduction, pp. i, 2 ; Keynes, Scope and Method, chs. 
4, 9, 10 ; Ely, Outlines, Bk. I., ch. 11 ; Marshall, Principles, Bk. 
I., ch. 5, §1; Fetter, Priuciples, ch. 2, § 2 ; Dictionaries and En- 
cyclopaedias for definition and scope of the various social sciences. 

4. Importance of tlie Economic Factor in Social Development. 
" Economic Interpretation of History." 

It is asserted by some that since * ' the existence of man 
depends upon his ability to sustain himself, the economic life 
is therefore the fundamental condition of all life. ' ' Marx says: 



8 Introductory. 

" The economic structure of society is the real basis on which 
the juridical and political superstructure is raised and to which 
definite forms of social thought correspond ; in short, the 
mode of production determines the character of the social, 
political and intellectual life generally." This "economic 
interpretation of history does not exhaust the possibilities of 
life and progress ; it does not explain all the nicities of human 
development ; but it emphasizes the forces which have hitherto 
been so largely instrumental in the rise and fall, in the pros- 
perity and decadence, in the glory and failure, in the weal 
and woe of nations and peoples. It is a relative rather than 
an absolute explanation." — Seligman. 

Seligman, Economic Interpretation of History ; Ghent, Mass 
and Class, ch. i; Marshall, Principles, pp. 1-4; Marshall, Econo- 
mics of Industry, pp. 1-4 ; Spargo, Socialism, ch. 4. 

5. Value of the Study of Economics. 

The study of Economics gives better understanding of his- 
tory, deeper insight into our present social organization, 
guiding principles in connection with nearly all social activi- 
ties, deeper sympathy and interest in connection with some 
profound social and ethical problems, intelligence and discre- 
tion with which to temper our feelings in the presence of 
social evils. It also provides a mental discipline surpassed 
by few if any studies ; since it encourages precision, accuracy, 
discrimination, clearness of thought and expression. Many 
of its problems are of such difficulty that they require most 
intense application. A continued chain of reasoning is con- 
stantly necessary as in a mathematical demonstration ; but 
since the forces and factors that must borne in mind are very 
numerous, comprehension and grasp in an unusual degree are 
necessary. It gives a training in that kind of thinking which 
is necessary for success in every day life and action. 

Andrews, Institutes of Economics, § 16 ; Laiighlin, Study of 
Political Economy, chs. 2, 3; Cossa, Introduction, pp. 93-110; 
Patten, American Economic Association Publications, 5: 473-4S6. 



CHAPTER II. 
FUNDAMENTAL CONCEPTS. 

f. Wealth. 

a. In defining wealth we hold to common usage and dis- 
criminate between wealth and welfare even though etymologi- 
cally and ethically such distinction be unfortunate. Wealth 
(as used in Economics) does not necessarily mean abundance 
Those goods having ability to satisfy a desire, which are ex- 
ternal to the individual, and limited in amount constitute 
wealth. Wealth is that which has power in exchange. 
Wealth may be private or public {=. social, or collective). 
Some valuable sources or conditions of wealth are not wealth. 
Although from a logical and psychological standpoint there 
is no difference between a service and the utility of a piece of 
wealth, services are not included in wealth. 

b. There has been constant change and evolution in the 
forms of wealth with development of human desires. The 
forms of wealth at any time and in any country are deter- 
mined by and reflect the prevailing civilization. A large 
amount of wealth at present consists of very durable but very 
indirect means of satisfying wants. 

c. Since man's power to devote himself to higher aims 
and activities depends upon possession of wealth sufficient to 
satisfy fundamental needs and is often conditioned upon pos- 
session of other contributory wealth, wealth is essential to 
individual and social progress ; and the study of Economics 
is a study of that which conditions science, art and all higher 
life. Wealth does not necessarily advance welfare or civiliza- 
tion. It is the nature of man, his tastes and interests which 



10 Fundamental Concepts. 

determine what things are wealth ; but these in turn are 
affected by his choice and use of wealth. 

Seligman, Principles, §§4, 5; Marshall, Principles, Bk. II., 
chs. I, 2 ; Economics of Industry, Bk. II., chs. i, 2; Davenport, 
Outlines, ch. 2; Bullock, Introduction, pp. 84-87; Fetter, Princi- 
ples, ch. 3; Gide, Principles, pp. 46-49; Andrews, Institutes, §§ i, 
2, with notes; Clark, Philosophy of Wealth, ch. i. 

2. Definitions Relating to Value. 

Utility is capacity to satisfy a want. Value is power in 
exchange or an estimate of utility. Price is value expressed 
in money. Demand means the quantity that will be taken at 
a given price. Supply means the quantity that will be 
furnished at a given price. 

Seager, IntroductioJi, § 26; Bullock, Introduction, §§ 107, in, 
112. 

3. Production and Consumption. 

Production is the creation of utility. Consumption is the 
destruction of utility. Labor is exertion with some other end 
in view than merely the pleasure involved in the exertion. 
Productive labor was formerly held to be only that which 
produced utility in durable form. All labor may be regarded 
as productive which accomplishes the end in view ; that is, 
which aids in the satisfaction of a want. Individual acquisi- 
tion is not necessarily social production. 

Marshall, Priftciples, Bk. II., ch. 3 ; Econotnics of Industry, Bk. 
II., ch. 3; Fetter, Principles, pp. 43, 257-260; Seligman, Princi- 
ples, §§ 119, 120; Clark, {Philosophy of Wealth, ch. 2; Gide, 
Principles , pp. 75-80. 

4. Income and Capital. 

A piece of wealth is desirable because of the utility that 
comes from it. There is an income of benefit. Common 
usage does not apply this term to the utilities coming from 
consumption goods ; but does apply it to the utility coming 
from wealth used in production of further wealth ; and also 
extends the term to any addition to wealth whether coming 



Fundamental Concepts. 1 1 

from use of land, from accumulated wealth used in produc- 
tion, or from human effort in forms of wages, salaries or 
profits. While the income is in reality one of utility or 
utility-producing wealth, it is commonly thought of and ex- 
pressed in terms of money. We think of income as a stream 
or flow — not as a store. 

One may sell for a lump sum his right to receive indefi- 
nitely an income from a piece of wealth, that is, its income 
may be capitalized as may any other income. Thinking, 
then, of such estimated lump-sum or capitalized values of in- 
comes of utility, we may say with Seligman that "the totality 
of capital is equivalent to the totality of wealth." But usage 
limits the word capital from the individual point of view to 
that " wealth which he devotes to acquiring an income in the 
form of money." — (Marshall). Further the usage of econo- 
mic discussion defines capital from the social point of view as 
' ' the products of past industry used as aids to further pro- 
duction," (Seager), excluding land. While the particular 
pieces of capital may be called capital goods, the business 
man thinks of capital as " the complex of capital goods used 
in connection with each branch of production measured in 
money." — (Seager). 

Capital is classified from point of view of durability as 
fixed or circulating ; from point of view of mobility as spec- 
ialised or free. 

Marshall, Principles, Bk. II., ch. 4 ; Marshall, Economics of 
Industry, Bk. II., ch. 4; Seager, Introduction, §§ 60; 69-71 ; Selig- 
man, Principles, %%(>; 137; Fetter, Principles, pp. 114-X17; Bul- 
lock, Introduction, pp. 131-138; Davenport, Outlines, pp. 119-121; 
Gide, Principles, pp. 120-129 ! Hadley, Economics, pp. 5-7; Mill, 
Principles, Bk. I., chs. 4, 6; Nicholson, Principles, Bk. I., ch. 6, 
except § 7; Walker, Political Economy, Part II., ch. 3; Andrews, 
Institutes, § 28; Hearn, Plutology, ch. 8, §1; Palgrave, Dictioft- 
ary, article Capital. 



CHAPTER III. 

NATURE AND DEVELOPMENT OF ECONOMIC 
SOCIETY. 

I. Organic Nature of Society. 

A society is not an accidental aggregation of unrelated in- 
dividuals but is organic in character. It has the power of 
growth from within ; it manifests " differentiation " or spec- 
ialisation of function, and "integration " or that close inter- 
dependence and inter-relation of parts which creates an 
essential unity. Social evolution is in accord with the general 
evolutionary tendency from the homogeneous, or generalized, 
to the heterogeneous, or specialised. An efficient cause of 
progress has been that "struggle for existence " which results 
in the "natural selection" of those methods, institutions, 
structures, groups "which are best fitted to derive benefit 
from their environment." Social evolution is not merely 
biological but largely psychical. Whether this evolution 
results in progress or degeneracy depends upon whether or 
not it helps create a social environment favorable to that 
higher personality which is the goal of human existence. In 
the field of economic structure and activity the highly organic 
nature of modern society is preeminently apparent. 

Marshall, Principles, Bk. IV., ch. 8; Economics of Industry, 
Bk. IV., ch. 8; Fairbanks, Introduction to Sociology, pp. 31-44; 
Small and Vincent, Introduction to the Study of Society, pp. 87- 
96; Ritchie, Principles of State Interference, pp. 3-51; Darwinism 
and Politics, pp. 1-83 ; McKechnie, The State and the Individual, 
pp. 1-26. 

2. Characteristics of RAodern Industrial Society. 

Prominent in modern industry are separation of occupa- 
tions ; division of labor ; great diversity in required industrial 



Development of Economic Society, 13 

skill ; opportunity for extensive wage employment of un- 
skilled laborers including women and children ; large indus- 
trial units ; trusts ; local specialisation of industries ; rapidity 
and cheapness of communication and transportation ; separa- 
tion of industrial functions ; the wages system ; enormous 
employment of capital ; profit as the test of success ; money ; 
the credit system with its elaborate machinery ; possibility of 
economic maladjustment ; crisis and depressions. Economic 
freedom, competition and recognition of the private property 
right are general characteristics of modern society that exert 
profound influence on all its economic and social relations 
and give rise to many of the more special characteristics 
mentioned above. 

These characteristics are not the result of conscious action 
or catastrophy but of a long process of evolution. 

3 Evolution of Private Property. 

From communal ownership is developed individual owner- 
ship of weapons, animals, slaves, chattels, land. The origin 
of individual ownership is often force and fraud ; but the 
development and persistence of the system of private property 
rights has its real explanation in the fact that it encouraged 
industry, thrift and accumulation of wealth which aided the 
social groups possessing them to survive. The occupation, 
natural rights, labor and legal theories of private property 
have been replaced by the social utility theory. The private 
property right in its various aspects is, then, limited by this 
principle of social utility. 

Seligmati, Principles, ch. 9, and works there cited; Hadley, 
Economics, pp. 26-34; Fetter, Principles, pp. 362-369; Gide, 
Principles, pp. 428437; Ely, Outlines, pp. 257-264; Palgravc, 
Dictionary of Political Economy article Property. 

4. Evolution of Freedom. 

Freedom in the sense of positive capacity for self-deter- 
mined action was unknown among savages. Subjection to 



14 Development of Economic Society. 

nature, to the strong and to custom was accompanied by ex- 
termination of captives. Slavery, serfdom and tlie wage 
system, each introduced because of its relative economic 
superiority, were steps in advance. There is now a consider- 
able degree of freedom as of marriage, movement, occupation, 
association, consumption, production, contract, trade. Lib- 
erty is not an end but a means to that higher development 
of individuality which is the only real freedom. Liberty 
except as based on equality and a sense of social responsibil- 
ity is dangerous ; and hence we must by social control re- 
strict liberty to secure freedom. Positive individual free- 
dom is a social product. 

Seligraan, Principles, ch. ii; Hadley, Economics, §§ 29-44, 78- 
82; Fetter, Principles, ch. 44; Ely, Outlines, p. 42, pp. 267-270; 
Webb, Industrial Democracy, pp 844-850; Problems of Modern 
Industry, ch. 10; Ritchie, Principles of State hiterference, pp. 83- 
151; McKechnie, The State and the Individual, pp. 305-321; 
Ritchie, Natural Rights, pp. 135-147. 

5. Evolution of Competition. 

Competition, a form of freedom, has undergone develop- 
ment. At first largely a rivalry between groups it becomes 
more and more extensive within the group. Under modern 
industry competition has tended constantly to replace custom 
as a determinant of price. While more necessary, it is also 
more pregnant with danger. It is the cause of progress, 
selecting those who can best serve society, leading to accu- 
mulation of wealth, protecting the consumer, encouraging 
energy. It is found between commodities, between individ- 
uals, between markets, between classes, between countries. 
It involves dangers and without initial equality of competitors 
may not realize its benefits. It must be limited and controlled 
by custom, co-operation, monopoly or government regulation. 

Selijjman, Principles, ch. 10; Marshall, Principles, Bk. I., chs. 
2,3; Economics of Industry, Bk. I., ch. 2; Hadlej^ Economics, 
§§ 76, 77,87,97; Fetter, Principles, pp. 425-430; Hadl&y, Freedom 
and Respotisibility , ch. 5 ; Ely, Evolution of Industrial Society, 
pp. 123-163; Palgrave, Dictionary of Political Economy two 
articles on Competition. 



Development of Economic Society. 1 5 

6. Evolution of Economic Stages. 

There have been various explanations of economic develop- 
ment ; as, barter, money," credit economies ; or from status 
to contract ; or from a militant to an industrial society ; or 
through hunting, pastoral, agricultural, commercial, indus- 
trial stages ; or stone, bronze, iron, steel ages. Although 
these are all suggestive and partially true, they are inadequate. 
From the economic standpoint there are ' 'three great stages 
known respectively as the self-sufficing economy, the trade or 
commercial economy, and the capitalist or industrial econ- 
omy." (Seligman.) 

Seligman, Principles, ch. 5 and works there cited ; Ely, Evolu- 
tion of Industrial Society, pp. 3 73; Bucher, Industrial Evolution, 
chs. 1-3. 

7. Evolution of Industrial Organization. 

a. Including under "industrial organization" the rela- 
tion of the producer to the consumer, of the different classes 
and occupations of workers to each other, of the different 
classes of workers to capital and to risks of sale, of hand work 
to capital, we find constant development of more complex rela- 
tions. 

b. Under the 'yaw/Zv system" "production was carried on 
within the family, by the family, for the family." There was 
no market ; no wage ; no machinery ; little division of labor ; 
little capital ; little separation of industrial function. Tran- 
sition begins in the hiring of itinerant or more permanent 
workmen. This system is exemplified more or less fully in 
the slave plantation of early Rome, in the mediaeval manor, 
in the frontier farm, in the Southern plantation. 

c. Under the "guild ' ' or handicraft system the producer of 
a good produces it for others ; he owns tools and material ; 
he works by hand ; he works at a specific trade ; he may em- 
ploy others but they are "help" on their way to independ- 
ence and a status like his own ; he assumes the risk of finding 



1 6 Development of Economic Society. 

a market and deals directly with the consumers of his prod- 
ucts. In the Middle Ages such producers formed associa- 
tions or guilds in each trade to promote the welfare of that 
trade. They came to regulate conditions of work and the 
character of goods and acquired large civic and political 
power. 

d. Under the domestic system the work is done by crafts- 
men as under the guild system but a capitalist takes 
the risks of sale and often furnishes the materials. The 
typical producer under the domestic system did not own raw 
material or finished product and tended to rent the more ex- 
pensive tools. This capitalist is not a hand-worker but an 
employer or entrepreneur. The market is a comparatively 
wide one. Means of transportation, of exchange and of 
handling capital are improved. In the textile industries this 
system was dominant in England from the sixteenth to the 
eighteenth century. 

e. Under Xkit factory system there is an enormous increase 
in capital in the form of buildings, machinery, power, mater- 
ials. Not only materials but machinery and place of work 
are owned or are controlled by employer. To utilize power, 
machines must be in one place so that many workers are in 
one factory. The worker is nothing else and his work is 
narrowly specialized. There is differentiation of industrial 
function. The market is greatly widened by enormously im- 
proved means of transportation. Exchange and credit are 
highly organized. This system began in England at the end 
of the eighteenth century as a result of great inventions in the 
textile manufacture. 

f. The efficient cause of the development of the later 
systems has been the superiority of each over the preceding 
in producing goods cheaply. In some lines of work since 
such superiority has not existed, the development did not 
take place and we have survivals of older methods. 



Development of Economic Society. 17 

There is a large amount of literature upon the different phases 
of industry but many of these books are either too voluminous, 
too detailed or too neglectful of essential distinctions to be of 
use in this course. The whole subject constitutes the work of 
the course in Economic History. Seager, hitroduction, ch. i ; 
Seligman, Principles, pp. 88-95; Ashley, English Economic 
Hislory, passim as Vol. II., pp. 219-222: Bucher, Industrial Evo- 
lution, ch. 4; Hobson, Evohition of Modern Capitalism, chs. 2, 
3; Toynbee, The Industrial Revolution, pp. 178-202; Veblen, 
Theory of Btisiness Enterprise, chs. 2, 3. 

8. Development of Economic Thought. 

a. The economic thought of each age is a reflex of its 
economic life and economic problems. 

b. The prevalence of slavery and the consequent contempt 
for labor limited the economic thinking of the ancient world 
to questions of property right, division of labor, usury and 
money. 

c. The predominant religious character of the age and the 
development of industry and commerce by free labor made 
the mediaeval thinking center around the ethics of price, in- 
terest and money. 

d. The revival of commerce after the Crusades, changes 
of price due to money from the New World, debasement of 
coinage and particularly the growth of centralized states need- 
ing revenues, standing armies and navies, and owning colon- 
ies, aroused much practical politico -economic thinking. 

e. The resulting Mercantile System emphasized the neces- 
sity to a nation's welfare of a large stock of money resulting 
from a favorable balance of trade, of manufactures, of shipping, 
of large population and of colonies — all as essentials of a 
successful national policy. 

/. The philosophical and political thought of the eigh- 
teenth century and the errors of the mercantilist thinking led 
to a revolt. The Physiocrats emphasized food rather than 
money as wealth ; agriculture as the productive industry since 



1 8 Development of Economic Society. 

it alone was said to give a net product ; natural rights ; natural 
law ; and freedom of all economic activity from governmental 
control. Laissez-faire. Quesnay, Turgot. 

g. Adam Smith was largely influenced by the Physiocrats, 
emphasizing the cosmopolitan point of view and natural lib- 
erty as a means to general welfare. But he finds in all in- 
dustry the source of wealth ; and his theory of distribution is 
a reflex of contemporary economic changes and conditions. 
His Wealth of Nations (1776) is the foundation of modern 
economic thinking. 

h. Production for large markets, the necessity of profit, 
the differentiation of industrial classes, the increase of capital 
brought to the front problems of value and distribution. 
These were treated by the English school led by Ricardo, 
Malthus, Senior and summed up J. S. Mill. Wealth, com- 
petition, non-interference were emphasized. 

i. The unfortunate social results of the new industrial 
system and the dehumanized character of the contemporary 
economic theory led to revolts on ethical grounds by Ruskin 
and Carlyle and on theoretical grounds by the socialists like 
Karl Marx. 

j. Against the deductive a pi-iori method of the English 
school the Historical school made great objection, advoca- 
ting inductive study and insisting upon the relativity of econ- 
omic theory. 

k. The Austrian school of the present returns to the de- 
ductive method but has a new psychological basis in its theory 
of utility. 

/. Contemporary British and American economists, feel - 
ing the influence of all these lines of thought, using historical 
and deductive methods, accepting the theory of marginal 
utility, show, as Seligman says "how and why social pro- 



Development of Economic Society. 19 

gress and the growth of capital are intimately bound up with 
the advance of the mass of the workers." 

Se\ifCxna.n, Pri?iciples, ch. S ; Andrews. lusliiuie, §§ 5-15; Mar- 
shall Principles. Bk I., ch. 4; Gide, Principles, pp. 7-14; Ingram, 
History of Political Econo^ny (more conveniently used in its or- 
iginal form as the article Political Economy in Encyclopaedia 
Britannica); Qossa. Introduction, Historical Part; articles in Pal- 
grave, Dictionary, and in the International Encyclopcsdia; Price, 
Short History of Political Economy in England; Cohn, A History 
of Political Eco7iomy. 



CHAPTER IV. 
WANTS AND THEIR SATISFACTION. 

I. The Nature and Economic Significance of Wants. 

Human wants vary with race, climate, stage of civilization, 
individual development physically, intellectually, aestheti- 
cally, morally, religiously. They are capable of indefinite 
expansion ; limited in intensity ; competitive ; complimen- 
tary ; largely matters of habit and fashion. The want is the 
cause of economic activity. Wants cause activities but activ- 
ities cause new Avants. 

Marshall, Principles, Bk. III., ch. 2; Economics of Industry , Bk. 
III., ch. 2; BuUoci., In trodncf ton, pp. 79-84; Seager, Introduction, 
§§ 34. 37; Fetter, Principles, ch. 2; Gide, Principles, pp. 40-45; 
Hearn, Plutology, ch. 1; Andrews, Institutes, pp. 190-194; Dav- 
enport Outlines, % 8; Smart, Introduction to the Theory of Value, 
chs. 1-4. 

2. The Nature of Demand as Based Upon Diminishing Utility. 

a. Utility is capacity to satisfy a want and in economic 
terminology does not necessarily mean productive of well- 
being. Demand denotes effective desire. 

b. "The utilities of additional units of any good to any 
consumer diminish naturally as his supply of units of that 
good increases." (Seager). 

c. Consequently, although he might use much more of the 
article if it were a free good, he ceases his purchases at the 
point where, in his estimation, the utility of the last addition 
to his stock is only equal to its cost. The utility of this last 
portion acquired is the marginal titility of the commodity to 
him. 

d. It follows that, as the price is lowered, the purchase of 
additional units will be made since their utilities will success- 



Wants and Their Satisfaction. 21 

ively equal the falHng price; and, as the price rises, purchases 
will be diminished since this rising price will successively be 
greater than the estimate of the utility of the units previously 
bought. Hence results the Law 0/ Demand thsLt, other con- 
ditions remaining the same, the amount demanded increases 
with a fall and decreases with a rise in price. 

e. Demand schedules of individuals are different because 
the marginal utility of money varies to different persons and 
because of varying intensity of desire. 

/. " Value is not merely the expression of marginal util- 
ity; it is the expression of social marginal utility." (Selig- 
man). "Value in industrial society is the result of social 
valuation. It is not so much man's estimate as society's esti- 
mate of marginal utility." (Seager). 

g. " Most goods are not simple utilities but bundles of 
utilities," (Seager) and "value is the expression of the social 
marginal increments of utility which are bundled together or 
united in anything, and each of which is marginal to a dif- 
ferent class." (Seligman). 

Marshall, Principles, Bk. III.,cli. 3; Economics of Industry, 
Bk. III., ch. 3; Seager, Introduction, pp. 81-9S; Seligman, Prin- 
ciples, ch. 12; Fetter, Principles, pp. 21-29; Gide, Principles, pp. 
52-59; 'QxxWock., Ititroduction, pp. S8-97, 110-113; Flux, Economic 
Principles, pp. 20-25; Pierson, Principles, ^^. 54-61; Carver, Dis- 
tribution, pp. 1-27; Clark, Distribution, ch.'i6; Davenport, Out- 
lines, pp. 14-16, 35-37; Smart, Introduction to Theory of Value, 
chs. 6, 7. 

3. Elasticity of Demand. 

Elasticity of demand refers to the degree in which demand 
responds to changes in price. It varies greatly according to 
the nature of the article and the income of the purchaser. 

Marshall, Principles, Bk. III., ch. 4; Economics of Industry, 
Bk. III., ch, 4; Seager, Introduction, pp. 66, 67; Seligman, Prin- 
ciples, §102; Fetter, Principles, p. 29; VYvc^, Economic Principles, 
PP- 25-31. 



22 Wants and Their Satisfaction. 

4. Comparison of Utilities. 

" If a person has a thing which he can put to several uses, 
he will distribute it between these uses in such a way that it 
has the same marginal utility in all. For if it had a greater 
marginal utility in one use than another, he would gain by 
taking away some of it from the second use and applying it 
to the first". (Marshall). Similarly one's total expendi- 
ture of money or effort tends to be so directed that marginal 
utilities in different lines will be equal. 

"The utility of future goods is less to the normal consum- 
er than the utility of present goods of like kind and quality 
by an amount varying directly with the degree of futurity ". 
(Seager). 

Marshall, Principles, Bk. III.,ch. 5; Economics of Industry, 
Bk. III., ch. 5; Seager, Introduction, §36; Bvi\\ock,\Introduction, 
§ 61; Davenport, Outlines, §§ 29-32. 



CHAPTER V. 
PRODUCTION OF WEALTH. 

A. GENERAIi CONSIDERATIONS. 

a. Production is the creation of utilities of form, time or 
place ; and is closely related to consumption. 

b. Production involves sacrifice and time. 

c. The factors of production are nature, labor, capital. 
Since production is a social process, the efficiency of these 
factors will depend largely upon the system or organization 
that brings them together ; and upon due appreciation of the 
significance of the human factor. 

Seligttian, Principles, ch. i8; Marshall, Principles, Bk. IV., 
ch. i; Economics of Industry, Bk. IV., ch. i; Seager, Introduc- 
tion, §§ 27, 28; Fetter, Principles, ch. 28; Bullock, Introduction, 
pp. 115-118; Andrews, Institutes, §§18-22; Mill, Principles, 'Sk.. 
I., chs. I, 2, 3; Clark, Philosophy of Wealth, ch. 2; Nicholson, 
Principles, Bk. I., ch. 2; Elemejits, pp. 32-47. 

B. NATURE. 

1 . Classification of Nature's Contributions to Production. 

2. Influence of Nature Upon Man's Economic Life. 

3. Exhaustion of Natural Wealth. 

a. Some natural resources may be permanently exhausted. 

b. Some natural resources are incapable of permanent ex- 
haustion. 

c. Some natural resources replace themselves more or less 
completely by growth. 

4. Man's Ability to Overcome Tendencies Toward Exhaustion. 

a. Minerals cannot be increased. Necessity of economy 
in utilization. Progress of science makes possible utilization 
of low grade ores which practically means an increase in 
quantity. 



24 Production of Wealth. 

b. Fisheries in some cases seem inexhaustible. In other 
cases much may be done to overcome tendency to exhaustion. 

c. Forests. American tendencies. Need of scientific for- 
estry. 

d. Limited area of desirable building land. Methods of 
overcoming this limit. Modern building methods. Rapid 
transit. 

e. Fertility of the soil for agricultural uses may be in- 
creased by cultivation ; soil mixture ; irrigation ; draining 
and clearing ; fertilization ; artificial climatic conditions. 

5. The Law of Diminishing Returns. 

a. At any particular time and in any particular stage of 
soil exhaustion and scientific knowledge, successive equal ap- 
plications of effort to a given area of land will, after a certain 
point is reached, yield returns less than proportionate. 

b. This law is frequently erroneously thought to refer to 
exhaustion of the soil. 

c. This law is frequently erroneously thought to refer to 
successive periods of time. 

Marshall, Principles, Bk. IV., chs. 2, 3; Economics of hidtistry^ 
Bk. IV., chs. 2, 3; Seligman, Principles, §§88, 132-135; Sealer, 
IntroductioJi, §§ 61-66; Bullock, Introduction, §§ 76, 96-99; Gide, 
Principles, pp. 86-103; Fetter, Principles, ch. 7, § ii. ; ch. 9; ch. 
11; yiiW, Principles, Bk.I.,ch. 12; Andrews, Institutes, §§23,24, 
34, 39; Hearn, Plutology, chs. 5, 6; Nicholson, Elements, Bk. 
I., ch. 6; Principles, Bk. I., chs. 4, 10. 

C. LABOR. 

I. General Considerations Regarding Labor. 

a. Definition. Productive and unproductive labor. (See 
ch. ii., 3). 

b. Labor of different individuals varies greatly in its pre- 
dominant characteristics — some being largely muscular, some 
manual, some inventive, some supervisory, some protective, 
etc. 



Production of Wealth. 25 

c. Every satisfaction of a want involves the performance 
of labor. 

d. Work, which, within certain limits may be pleasure, 
education and wholesome discipline, becomes, if continued, 
irksome toil, intellectually stunting, morally debasing and 
economically less productive. 

e. The labor force of a country depends upon its (i) 
Quantity; (2) Quality. 

2. Amount of the Labor Force. 

a. The labor force of a country depends directly upon 
the population. Increase of population depends upon 

(i) The birth rate. This is influenced by the marriage 
rate which is affected by conditions of prosperity. This lat- 
ter influence is due to the private property right, and to 
parental rather than social responsibility for maintenance. 
The number of births per marriage varies greatly in different 
countries and in different social classes. In recent years it 
has decreased in the United States, England and some other 
countries, partly because of an increasing standard of comfort 
and partly because of certain social tendencies. 

(2) The death rate. This is dependent upon many con- 
siderations — sanitary, medical, social, industrial and govern- 
mental. Other conditions remaining constant, the death rate 
tends to decrease with increasing prosperity. 

(3) Migration. The balance between emigration and 
immigration is an important influence upon the population of 
certain countries. In the United States immigration responds 
quickly to prosperity. 

(4) Prosperity tends to increase the rate of increase of 
population in the United States since it accelerates the birth 
rate and immigration, and retards the death rate. 

(5) It is socially better to maintain a certain increase of 
population by a low birth rate and a low death rate than by a 
high birth rate and a high death rate. 



26 Production of Wealth. 

b. The labor force of a country is affected by the distribu- 
tion of population by age periods. The number of efficient 
laborers will be smaller in a country in which there is an un- 
due proportion of young children. 

c. The labor force of a country is affected by the distribu- 
tion of the population between productive and non-productive 
classes. In the latter are paupers, insane, tramps, idle rich 
and other drones. It is also decreased if there are too many 
relatively in certain professions or occupations, so that they 
are not fully employed. Certain countries suffer because the 
class of priests is relatively too large, being recruited by non- 
economic causes. 

d. The amount of labor depends upon the number of days 
in the year and hours in the day devoted to work. Many 
holidays for religious or other reasons and short working days 
seriously decrease productiveness in certain countries. How- 
ever, a lack of holidays and rest days and an excessive dur- 
ation of the work day exert an unfortunate influence on the 
efficiency of the laborer and decrease production. 

e. An increase in the population may exert an influence 
on production less than proportionate if it involves pressure 
on subsistence ; or more than proportionate if it allows co- 
operation and organization to a greater extent than were pre- 
viously possible. 

/. Note. Malthus' Theory of Population. 

Thomas Robert Malthus in the first edition of his Essay 
on Population (1798) maintained against Condorcet, God- 
win and others that great progress in human happiness was 
impossible since population tended to increase geometrically, 
while food increased only arithmetically ; with the result of 
pressure upon subsistence, except so far as population was 
limited by other positive checks such as vice, war, famine. 
The admission, in a second edition (1803), of the possibility 



Production of Wealth. 27 

of the preventive check of "moral restraint" made more cor- 
rect his theory of population, but ruined his argument against 
the perfectionists. Against Malthus' theory it is urged that 
there are physiological, social and economic hindrances which 
prevent the birth rate attaining its maximum ; and that pro- 
gress in science and the arts reveals almost unlimited possibili- 
ties of improvement in raising and working up food supply 
and raw material. It is also claimed an increasing popula- 
tion is relatively more efficient because of better organization. 

Marshall, Principles, Bk. IV., ch. 4; Economics of Industry, 
Bk. IV., ch. 4; Seligman, Principles, ch. 4 and §130; Seager, 
Introduction,^^. 'i&i-7.<^\\ Bulloch, Ifitroduction, §§77-78; Fet- 
ter, Principles, chs. 20-21; Andrews, Institutes, §§ 25, 26, 27, 35; 
Hadley, Economics, pp. 41-51; GiAq, Principles, pp. 71-85, 666- 
669; Mill, Principles, Bk. I., chs. 2, 3, 10 ; Nicholson, Principles, 
Bk. I., chs. 5, 11; Elements, Bk. I., ch. 7; Walker, Political Econ- 
omy, pp. 301-314; George, Progress and Poverty, pp. 81-124. 

3. Efficiency of the Individual Laborer. 

a. The laborer is as rule more efficient as he is a well de- 
veloped man. Muscular strength, nervous energy, intelli- 
gence, taste, character affect his productivity although their 
relative importance in different occupations varies greatly. 
Nervous energy, intelligence, character (in the sense of hon- 
esty, industry, accuracy, resourcefulness, reliability) are in 
every line of work important. In some lines muscular 
strength has become relatively less necessary. One of the 
serious indictments against our present industry is that it 
blunts the artistic sense; but there is a growing perception of 
the need for taste in many lines of manufacture. 

b. The qualities which make one an efficient laborer de- 
pend largely upon the Standard of Living and respond more or 
less closely to its changes. The Standard of Living is largely 
dependent upon income. The quantity, kinds and combina- 
tions of food ; its preparation and cooking ; housing accom- 
modations, reasonable leisure, proper recreations and amuse- 



28 Production of Wealth. 

ments ; time and means for education; avoidance of improper 
expenditure for stimulants and narcotics, etc., react sooner 
or later on efficiency. 

c. Hope, freedom, security and incentive affect product- 
iveness. Hence the system of industrial remuneration whether 
slavery, time wages, piece wages, profit-sharing, co-operation, 
premium-plan, economic independence is significant. The 
social system and the government have their effect, as have 
systems of land tenure and the property right. 

d. Occupational and industrial conditions affect general 
vigor, nervous energy, intellectual and artistic development, 
moral character. Particularly in the case of children is this 
true since they are in an undeveloped formative condition. 
Child labor is even from the merely economic point of view 
objectionable as a great draft on future efficiency. Compul- 
sory education and factory laws are aids to efficiency. 

e. Modern city life has its effect on the productive effic- 
iency of the laborer because of housing congestion, lack of 
air and play grounds, undue nervous stimulus, spread of con- 
tagion, etc. The strongest physique, nervous energy and 
character of the country tend toward the city and there tend 
to be exhausted. Such evil tendencies may be largely over- 
come by social effort. 

f. Efficiency is increased by education whether of common 
school, high or college, whether liberal, manual, trade or 
technical. Much education comes from other agencies than 
the school, as the home, the factory or shop, the systematic 
apprenticeship. 

g. The economic efficiency of a worker is largely deter- 
mined by the economic, intellectual, artistic, political, moral 
standards and institutions of the society in which he lives 
and especially of the social class to which he belongs. Man 
is a social product. 



Production of Wealth. 29 

h. An individual's efficiency depends largely upon his 
finding that place for which he is most fit. Anything which 
hinders such adjustments, as social and industrial grades, or 
inequality of opportunity interferes with social efficiency. So 
far as a greater degree of economic equality is naturally se- 
cured, it increases equality of opportunity and hence 
efficiency. 

/. Economic progress like social progress generally has 
depended upon the elimination of the inefficient and the 
selection of the efficient. Although humanitarian efforts to 
prevent such elimination may and sometimes do tend to in- 
terfere with progress in economic efficiency, we need not con- 
clude that such philanthropy is necessarily uneconomic. Ef- 
ficiency depends partly upon the acquirement of much race 
tradition, knowledge, skill. Those naturally prone to elimi- 
nation but preserved by philanthropy may by such acquire- 
ment become efficient. Further the qualities of character 
necessary for efficiency in a society are not entirely the same 
as those for a Robinson Crusoe. Philanthropy by cultivating 
social traits may indirectly promote efficiency. 

j. Although those qualities which produce efficiency are 
partly the result of non-economic causes, still in a large de- 
gree economic efficiency is a direct response to the demand 
for it as shown in w^ages, salary and profits. 

Marshall, Principles, Bk. IV., chs. 5, 6; Economics of Industry, 
Bk. IV,, chs. 5, 6; Fetter, Principles, pp. 195-201; Seager, Intro- 
duction, ^^^. 120-125; Seligman, Principles, § 126, §130; Mill, 
Principles, Bk. I., ch. 7, Bk. II., chs. 5-9; Hearn, Plutology, chs. 3, 
4, Hadley, Economics, § § 22-27, 362-368; Nicholson, Principles^ 
Bk. I., ch. 5, § 4; Andrews, Institutes, § 36. 

D. CAPITAL. 

1. Definition and Distinctions. (See chap, ii., 4.) 

2. Forms Which Capital Assumes. 

Bullock, Introduction, pp. 133-135; Seager, Eitroduction, pp. 
132-134, Seligman, Principles, § 137; Marshall, Principles, Bk. 
IV., ch. 7, §^ 1-3; Economics of Industry , Bk. IV., ch. 7, § i; An- 
drews, Institutes, § 29. 



30 Production of Wealth. 

3. Advantages of Capitalistic Production. 

Although indirect and involving delay, capitalistic pro- 
duction is advantageous since it enables man to employ his 
strength more effectively or to use natural forces otherwise 
useless. 

Seager, Intt'odudion, pp. 125-126, 134-135; Bullock, Introduc- 
tion, pp. 131 132; Seligman, Principles^ §§ 138, 140; Hearn, Plzi- 
tology, ch. 8, §§ 2-4. 

4. Capital Subject to the Law of Diminishing Returns. 

Although capital enormously increases production, it is 

still true that, at any particular time, with a constant 

labor force and provided there be no change in industrial 

knowledge and methods, the law of diminishing returns holds 

true in the case of successive units of capital. 

Seager, Introduction, pp. 128-129; Fetter, Principles, pp. 61 62, 
66-72; Seligman, Principles, § 168. 

5. Capital Involves "Abstinence" or "Waiting"; and Its 
Accumulation Depends upon 

a. Ability to save, or surplus of income above expendi- 
ture. 

b. Willingness to save which is encouraged by political 
and economic security, family affection and a high rate of in- 
terest. Since a future utility is regarded as less desirable 
than a present one, saving is largely dependent upon a rate of 
interest high enough to overcome the superior attractiveness 
of a present good. Some saving, however, is regardless of 
the rate of interest having in view a sum rather than an in- 
come, while in other cases the determination to secure a cer- 
tain income results in greater saving with a low than with a 
high rate of interest. 

Marshall, Principles, Bk. IV., ch. 7, §g 4-10; Economics of 
Industry, Bk. IV., ch. 7, §§ 2-6; Bullock, Inti^oductio?!, pp. 140- 
141; Fetter, Principles, ch. 19; Seligman, Principles, § 139; 
Gide, Principles, pp. 688-692, 129-131; Mill, Principles, Ws.: 1., 
ch. 11; Nicholson, Principles, Bk. I., ch. 12; Elements, Bk. I., 
ch. 8; Hearn, Plutology, ch. 9. 



Production of Wealth. 31 

6. Methods of Accumulating Capital. 

a. By saving and investing. 

b. By borrowing and investing. 

c. Accumulation of capital is much facilitated by modern 
financial methods and institutions, such as banks, savings 
banks, insurance companies, building and loan associations, 
etc., and by the representation of ownership by transferable 
stocks and bonds. 

Seager, Introduction, pp. 130-132; Bullock, Introduction, p. 
139; Gide, Principles, pp. 692-694, 697-700; Hamilton, Savings 
and Savings Institutions. 

7. Social Utility of Saving Capital. 

Economic (and hence social) progress has been largely de- 
pendent upon the accumulation of capital, since the amount 
of wealth production is largely determined by the quantity 
and form of capital. But wealth production is even more 
dependent upon the skill and training of the members of 
society. Social progress depends upon due proportion be- 
tween saving and wise consumption. 

Hamilton, Savings and Savings Institutions, ch. i ; Gide, 
Principles, pp. 694-697; Hadley, Economics, p. 147; Hearn, 
Pliitology, ch. 8, §§ 5-8; Hobson, Evolution of Modern Capital- 
ism, pp. 182-209. 

8. Supply Price of Capital. 

There is a direct response of the supply of capital to the 
demand for it as revealed by changes in the rate of interest. 

E. INI>USTJRIAL ORGANIZATION. 

I. Production a Social Process. 

Production is not individual but a complicated social affair 
involving much "differentiation" of occupation, of pro- 
cess, of function, of locality. This differentiation involves 
interdependence of the parts of the industrial organ- 
ization. While this enormously increases the efficiency of 



32 Production of WeaUh. 

production, it involves serious maladjustments and makes an 
injury to a part the concern of all. 

Marshall, Principles, Bk. IV., eh. 8; Economics of Industry, 
Bk. IV., ch. 8; Hearu, Pliitology, pp. 291-305. 

2. Division of Labor : Co-operation. 

a. The productive efficiency of a people is much increased 
by the co operative efforts of workers. Co-operation even 
without differentiation of work often promotes ethciency but 
the economic gain is most apparent when each instead of be- 
ing a Jack-of-all-trades becomes a specialist. 

b. The cause is found in the economic advantage of a low- 
ering of cost of production. This is due to (i) increased 
dexterity; (2) shortening of apprenticeship; (3) saving of 
time in changing work; (4) stimulus to invention; (5) econ- 
omy of ability; (6) economy of material; (7) economy of 
tools and machinery. 

c. Against the immediate economic gain are alleged social 
disadvantages some of which are in the long run causes of 
economic loss. Such are physical injury, monotony leading 
to intellectual deterioration, dependence because of the nar- 
rowing of the field of employment, excessive employment of 
women and children, destruction of the aesthetic and con- 
structive faculties.. These are in part preventable by protec- 
tive labor legislation, shortening of the hours of work and an 
increase of educational and cultural opportunities outside of 
working hours. 

d. The application of the principle of division of labor 
depends directly upon the size of the market, which is deter- 
mined by the growth of population and the increase of trans- 
portation facilities. 

e. In modern industry there is a tendency, as a particular 
process comes to be mechanical and monotonous, for a ma- 
chine to take it over. Frequently these separate machines are 



Production of Wealth, 33 

combined or replaced by a perfecting machine so that instead 
of many specialized laborers there are a few high grade labor- 
ers controlling and tending a complicated piece of mechanism. 

Smith, Wealth of Nations, Bk. I., chs. i, 2, 3; Marshall, Prin- 
ciples, Bk. IV., ch. (^\ Economics of Industry, Bk. IV., ch 9; Gide, 
Piinciples, pp. 173-182; Seager, Introduction, pp. 137-142; Bul- 
lock, Introduction, pp. 143-147; Seligman, Principles, §§ 127-129; 
Mill, Principles, Bk. I., ch. 8; Fetter, Principles, pp. 201-204; 
Nicholson, P rinciples, Bk. I., ch. 7; Elements, Bk. I., ch. 3; 
Hearn, Plutology, chs. 12, 13; Andrews, Institutes, pp. 69-73; 
Walker, Political Economy, pp. ^6-^(j;Tidhso-a, Evolutiofi of Mod- 
ern Capitalism, ch. 4, §§ 3-7; Plato, Republic, Bk. II., 369-371; 
Commons, labor Conditions in Slaughtering and Meat Packing, 
Quar. Jour. Econ., 19: i — Same article in Commons, Trade Un- 
ionism and labor Problems, pp. 223-228; see also pp. 324-329; 
Palgrave Dictionaiy, article Division of I^abor. 

3. Localization and Specialization of Industry. 

a. Not infrequently a considerable proportion of an in- 
dustry is localized in a district, city or town. In some 
cases a large proportion of all the industrial activity of a re- 
gion or city is occupied in one industry. The former is called 
localization of industry and the latter specialization of in- 
dustry. 

b. The original cause of such localization or specializa- 
tion is usually the presence of raw material; favorable soil or 
climate; transportation facilities; sources of cheap power; 
racial qualities. 

c. When an industry has once established itself, new con- 
cerns tend to the same place because of its advantages, such as 
trade knowledge prevalent there; a local market for skill; sub- 
sidiary trades; specialized machinery; general good trade re- 
pute. Specialization involves some disadvantages, as too ex- 
clusive a demand for one kind of labor, severe trade depress- 
ions, serious labor troubles, 

d. Localization and specialization are limited by size of 
the market and hence have tended to increase with improve- 
ment of transportation facilities. 



34 Production of Wealth. 

Tcvelfth Census of the United States, igoo, VII., pp. cxc-ccxiv. ; 
Marshall, Principles, Bk. IV., cli. lo; Economics of Industry, Bk. 
IV., ch. lo; Hobson, Evolution of Modern Capitalism, pp. 24 30. 
105-116; Hearn, Plutology, pp. 305-314. 

4. Size of the Business Unit. 

a. Efificiency of production is contingent upon the adjust- 
ment of the size of the business unit in each trade to its par- 
ticular needs. The tendency in typical modern industries has 
been toward eno mously large establishments employing 
thousands of laborers and millions of capital. In many lines 
of trade and manufacture the small establishment still prevails. 

b. Advantages of the large producer. 

(i) On the manufacturing or productive side. Economy 
of fixed capital, since specialized machinery and buildings 
can be kept constantly employed; of circulating capital; of 
technical skill; of materials since wastes and by-products 
may be utilized. Subsidiary industries may be maintained 
by large concerns. 

(2) On the commercial side. The large producer buys 
cheaplv, gets favorable transportation rates, handles freight 
cheaply, saves in selling expenses and advertising, often gets 
trade through a wide spread reputation. 

(3) On the side of general policy. The large producer 
can study markets, fashions, trade tendencies, development 
of localities. 

(4) Size itself gives power in the competitive struggle. 

c. Advantages of the small producer. 

(i) On the manufacturing side. In some trades a small 
factory has all possible efficiency coming from specialized 
machinery and division of labor. The owner can watch all 
processes carefully and prevent waste of labor and material. 
Subsidiary industries help the small producer while trade jour- 
nals spread knowledge. 

(2) On the commercial side. His advantages here are 
partly compensated for by alliance with expert jobbing and 



Production of Wealth. 35 

v/holesale houses. In lines in which taste and individuality 

are desired the small producer has, at least, an even chance. 

d. The actual result in any line of business depends upon 

the relative importance therein of the above considerations. 

Examples \n\S\. easily suggest themselves. 

Marshall, Principles, Bk. IV., ch. 11; Economics of Industry, 
Bk. IV., ch. 11; Hobson, Evolution of Modern Capitalism, pp. 
88-121; Seager, Introduction, pp. 149-152; Bullock, Introduction, 
pp. 170-178; Seligman, Prz'wrz^/^^, §§ 143-145; Gide, Principles, 
pp. 161-172; Mill, Principles, Bk. I., ch. 9, §§ i, 3, 4; Nicholson, 
Principles, Bk. I., chs. 8, 9; Elements, Bk. I., chs. 4, 5; Tivelfth 
Census of the United States, igoo, VII., pp. Ixxii-lxxv. 

5. Business KSanagement. 

a. There is a distinct economic function of management. 
The entrepreneur or undertaker of business establishes the 
business ; brings together and organizes labor, capital and 
natural resources ; assumes the risks ; gets the profits. Even 
though he works with his hands and owns the capital, the 
function of management is distinct. 

b. The successful entreprefieur must have knowledge of 
his trade, its materials, processes, machines, market tenden- 
cies. He must be able to select, organize and control labor 
of all grades without friction. He must have financial ability, 
foresight, caution, decision and energy. 

c. The forms of management are 

(i) Individual ownership. This secures unity of purpose 
and direction ; but in typical modern industries one indi- 
vidual rarely possesses the varied talents necessary for success, 
frequently lacks capital, and may not care to risk all in one 
line. 

(2) The partnership increases capital and combines varied 
abilities. It sometimes means friction, divided policy and 
indecision. 

(3) The corporation or joint-stock company ensures large 
capital, continuity of existence, limited liability, publicity 



36 Production of Wealth. 

when desirable, utilization of small capitals. There is often 
lack of personal interest on part of managers, and stockholders 
may be defrauded by those in control. 

(4) Cooperation, or managing ownership by workers or 
consumers, means direct personal interest; but lacks great 
managing ability and involves friction and divided responsi- 
bility. 

(5) Public ownership is another form of management. 

d. Sharp competition is continually eliminating those who 
have not ability, and, on the other hand, bringing needed 
capital to those who show success. There is a response of 
business ability to the demand for it. 

Marshall, Principles, Bk. IV., ch. 12; Economics of Industry, 
Bk. IV., ch. 12; Bullock, Introduction, §§90-91; Seligman, Prin- 
ciples, § 41; Seager, Principles, §§ 82-84; Fetter, Principles, ch, 
29, ch. 30, § I ; Andrews, Institutes, §46; Nicholson, Principles, 
Bk. I., ch. 8, § \; Eleventh Census of the Utiited States, igoo, VII., 
pp. Ixvi-lxviii. 

F. FUTURE OF PRODUCTION. 

The efficiency of wealth production in the future depends 
upon the combined influence of all the factors considered in 
this chapter. The law of diminishing returns, exhaustion of 
natural resources and anything that affects unfavorably the 
efficiency of the worker or the accumulation of capital, are 
unfavorable. Increasing efficiency of the worker; growing 
wealth; invention; application of science to agriculture, in- 
dustry and transportation; more efficient organization possi- 
ble with larger population, etc., etc., are favorable to increas- 
ing per capita production. 

Marshall, Principles, Bk. IV., ch. 13; Economics of Industry, 
Bk. IV., ch. 13; Fetter, Principles, pp. 558 563; Mill, Principles, 
Bk. IV., ch. i; Nicholson, Principles, Bk. I., ch. 10, § 5, ch. 11, 
§4. 



CHAPTER VI. 

EXCHANGE. BALANCING OF DEMAND AND 
SUPPLY. VALUE. 

I. Development and Advantage of Exchange. 

a. Exchange has been a gradual development increasing 
with the change from a self-sufificing to a capitalist economy. 
It has been encouraged and shaped by natural transportation 
routes ; and is both a result and a cause of modern efficiency 
of transportation. 

b. Exchange makes it possible " to utilize wealth which 
would remain unused " ; it increases utility ; it increases 
productivity by allowing specialization ; it generally benefits 
both parties. 

Bullock, Introduction, g§ 104, 105; Gide, Principles, pp. 184- 
186; 197-200; Andrews, Institutes, §§ 51, 52, 53; Fetter, Princi- 
ples, pp. 30-31; Nicholson, Principles, Bk. III., ch. i, §§3-6; 
Ely, Outlines, pp. 127-129; Pierson, Principles, pp. 67-72. 

2. Markets. 

a. Market formerly meant a place of sale. It now means 
those " buyers and sellers who are in such free intercourse with 
one another that the prices of the same goods tend to equality 
easily and quickly." 

b. Markets are continually widened by rapid and cheap 
transportation and communication. That a commodity may 
have a very wide market, it must be large in amount, exten- 
sively desired, portable, and capable of grading and exact 
description. 

Marshall, Principles, Bk. V., ch. i; Economics of Industry, Bk. 
v., ch. i; Bullock, Introduction, § 108; Fetter, Principles, pp. 
36-37; Seligman, Principles, p. 223; Nicholson, Principles, Bk. 
III., ch. 3; Elements, pp. 217-219; Hadley, Economics, § 88; 
Flux, Economic Principles, ch. 3. 



38 Value. 

3. General Considerations Upon Value. 

a. A prominent central fact in modern economic life is 
exchange of goods. Such exchange is conditioned upon a 
valuation accepted by buyer and seller. How is this value 
determined in the market of the moment ? Since such values 
are frequently obviously temporary, how are more natural 
values determined ? How are the departures of market from 
normal values to be explained ? What effect may monopoly 
have on value? How are such values related to wages, inter- 
est, profit and rent ? Such are fundamentally the problems 
of value. 

b. Nature does not produce in unlimited quantities the 
commodities we desire. To secure them requires labor or 
sacrifice. To secure greater and greater quantities (which to 
the individual have diminishing utility) requires more labor, 
which becomes irksome. Diminishing pleasure costs in- 
creasing pain. When the utility is equalled by the disutility, 
one stops effort to secure it. To the individual, marginal cost 
equals marginal utility. 

c. As value is determined by social 7narginal utility (see 
ch. 4, 2, f) so it is determined by social cost — not individual 
cost. Varying estimates of utility give the individual a sur- 
plus of total utility above total cost. This surplus does not 
affect value ; nor does the fact that a thing might cost a cer- 
tain individual more than the social cost affect its value. 
Value is a social problem. 

d. Utility determines value ; cost determines value ; but 
neither alone determines value. " We cannot speak of mar- 
ginal utility without implying cost ; we cannot speak of 
marginal cost without implying utility." (Seligman). 

e. Progress in civilization depends upon increasing the 
surplus of utility above cost, upon the just distribution of this 
surplus, and upon its wise consumption. 



Value. 39 

f. Value being a ratio, a general rise or fall of values is 
impossible, but a general rise or fall of prices is constantly- 
taking place. 

Seligman, /'r/;/n/>/£?5, ch. 13; Seager, Introduction, §§47-53; 
Marshall, Pri7iciples, Bk. III., ch. 6: Bk. IV. ch. i; Bk.' V., ch. 
2, § I, ch. 3, § 7; Economics of Industry, Bk. III., ch. 6; Bk. V., 
ch. 2, § I ; ch. 3, §7; Fetter, Principles, ch. 4; ch. 24, § 3; Gide, 
Principles, pp. 49-64; Clark, Philosophy 0/ Wealth, ch.'s; Nichol- 
son, Principles, Bk. III., ch. 2; Bullock, Introduction, § 95; 
Smart, Introduction to Theory of Value, ch. 8-9. 

4. Market Value. Temporary Balancing of Demand and Supply. 

a. Buyers are influenced by the urgency of their needs 
(demand schedules), by the amount of money available (mar- 
ginal utility of money), by their estimates of the course of 
prices in the immediate future. Sellers are influenced by the 
urgency of their need of money, by the amount of their stock, 
by their estimates of future prices. 

b. If there are one buyer and one seller, there is no sale 
unless buyer's maximum equals seller's minimum. If it is 
higher, then price will be fixed between these limits accord- 
ing to relative skill in bargaining. 

c. If there are several buyers and one seller, the most 
eager buyer will get the article if he meets the seller's mini- 
mum • if there are several units, each may be sold separately 
or a price may be fixed just sufficient to sell all. 

d. If there are several sellers and one buyer, competition 
will enable the buyer to get the article at the minimum of the 
most eager seller, or at a price just below the minimum of the 
next most eager seller, or somewhere between these two. 

e. The most typical case is that of several buyers and 
several sellers. Here, as in preceding cases, it is not simply 
a question of individuals (as implied in some text books), but 
of quantities. Sellers compete as a class with buyers as a class, 
but further each seller competes with other sellers and each 



40 Value. 

buyer with other buyers. If the lowest price of the most 
eager seller is higher than the highest price of the most eager 
buyer, there will be no sale. At a price which may be called 
the equilibrium price the same quantity will be offered and 
taken, and equilibrium will be established ; for at a higher 
price more will be offered than buyers will take, and com- 
petition among sellers will reduce the price, each reduction 
decreasing amount offered and increasing amount taken. 
Should price fall below equilibrium price conditions are 
reversed. 

f. "Under free competition there can be at a given time 
and place only a single price for the same commodity." "In 
case of competition the market price is always the one at 
which the greatest number of changes can be effected." 
(Seligman). 

Seligman, Principles, ch. 15; Seager, Introdiidion, %% 55-58; 
Marshall, Principles, Bk. V., ch. 2; Economics of Industry, Bk. 
v., ch. 2; Bullock, Introduction, %% 110-116; Fetter, Pi'inciples, 
ch. 5; Gide, Principles, pp. 186-196; Andrews, Institutes, %% 61-64; 
Hadley, Economics, %% 84-96; Nicholson, Elements, Bk. III., ch. 
2; Principles, Bk III.^ ch. 4; Hobson, Economics of Distribution, 
ch. I ; Smart, Introduction to the Study of J'alue, ch. 10, 11 ; Pier- 
son, Principles, pp. 72-75; Davenport, Outlines, ch.. 4. 

5. Normal Value. Balancing of Normal Demand and Normal 

Supply. 

a. Normal value of price " is the price which, apart from 
exceptional conditions, is expected to prevail, and to which 
actual prices seem constantly striving to adjust themselves." 
(Fetter) . 

b. Real cost of production consists of the efforts and sac- 
rifices necessary to production. The money that must be paid 
to call forth these efforts and sacrijices is the money cost or 
expenses of production. Cost of production means socially 
necessary cost of re -production. 

c. Expenses of production consisting of prices of mater- 
ials, wages, interest, wear and tear, earnings of management, 



Value. 41 

etc., constitute the suppjy price " required to call forth the 
exertion necessary for producing any given amount of a com- 
modity.'' (Marshall). By the Principle of Substitution pro- 
ducers are contiuually trying to substitute a less expensive 
method of securing certain results for that in use. 

d. At a given time cost of production is " the marginal 
cost of production; that is, it is the cost of production of 
those goods which are on the margin of not being produced 
at all, and which would not be produced if the price to be 
got for them were expected to be at all lower." (Marshall). 

e. " While the normal value is at any given moment at the 
point of maximum cost, it is under a condition of progress 
continually moving in the direction of minimum cost." 
(Seligman). 

/. When the demand price is greater than the cost of pro- 
duction, the attempt of sellers to reap resulting profits leads 
to an increased supply which can, however, find a market, 
other things being equal, only at a lower price. When price 
is below cost of production, conditions are reversed. In 
either case price tends to equal marginal cost of production. 
" When we say that price is fixed by the cost of production, 
we really mean that it is fixed aif the cost of production." 
(Seligman). 

g. The longer the period of adjustment as compared with 
the length of the period of production of a commodity, the 
more closely will price approach cost of production. But in 
actual life equilbrium is rarely attained since in a progressive 
society cost of production constantly changes. 

h. In general it may be said that both market and nor- 
mal values are determined * ' by demand and supply but in 
case of reproducible goods the permanent equilbrium between 
demand and supply tends to adjust itself to the cost of pro- 
duction." 



42 Value. 

/. In the case of certain commodities increasing demand 
means permanently higher cost of production; in the case of 
others it means constant cost; and in the case of still others 
it means lower cost. Normal values are correspondingly af- 
fected. 

j. " Not only in the case of wages and interest but in the 
case of economic relations and of concrete commodities, re- 
producible as well as non-reproducible, prices depend on mar- 
ginal efficiency ' ' which is the universal explanation of value. 

k. Selling value is a capitalization of estimated future 
uses, 

Seligman, Principles, §§ 103-109, 112-114; Marshall, Pi^'iticiples, 
Bk. v., chs. 3, 5; Economics of Industry, Bk. V., chs. 3, 5; Bul- 
lock, Introduction, %% 117-122; Fetter, Principles, ch. 30, ch. 43, 
§3; Clark, Philosophy of Wealth, chs. 5, 6; Ylohson, Economics oj 
Distribution, ch. 3; Nicholson, Principles, Bk. III., chs. 4-6; Car- 
ver, Distribittion of Wealth, pp. 25-52; Flux, Economic Princi- 
ples, ch. 4; Pierson, Principles, pp. 61-66. 

6. Influences that Hinder or Complicate Determination of Value. 

a. In studying value competition has been assumed to 
exist. Anything that interferes with competition interferes 
with the ordinary determination of value. The following are 
the more important causes of such interference : 

(i) Custom. This implies absence of competition. 
There may be competition in quality, however, even though 
prices be customary. 

(2) Ignorance. Competition is based upon intelligence. 
Misdirected production is the result of ignorance. 

(3) Lack of freedom. 

(4) Authoritative regulation. 

b. Large fixed capital. Certain elements of cost change 
proportionately with the quantity of product; other elements 
are more or less independent of output. The former may be 
called prime, the .later supplementary costs. Supplementary 
costs are largely due to fixed capital. Since it is often wise 



Value. 43 

to manufacture if supplementary costs are only partially or 
even not at all covered, it is obvious that adjustment of price 
to total cost of production may be delayed until the fixed cap- 
ital is adjusted. Also, since fixed capital cannot always be 
quickly supplied, price may remain above cost of production 
until capital is adjusted. There is here no new principle — 
only delay; but this condition is one of increasing practical 
importance. 

c. Rarely is the supply or demand for an article discon- 
nected from that of other articles. 

(i) Joint demand is a demand for the various factors nec- 
essary to produce an article. One of these joined factors 
may have its price much raised by a check to its supply if it 
is an essential but relatively small part of a much desired 
commodity, and if the other factors are elastic in demand. 

(2) Composite demand vs, a demand for an article for var- 
ious uses. The working of the laws of value is in such a case 
sometimes obscure, since a radical change in the demand for 
one use may have but slight effect on the total demand. 

(3) Joint supply is the supply of certain articles which are 
inevitably common products of a process. Some of these are 
called by-products and they are of increasing practical impor- 
tance. In such cases the cost is a joint cost of the whole and 
the normal price of all the parts together adjusts itself to the 
joint cost. 

(4) Composite supply is the meeting of a certain want by 
several rival articles that may be substituted for each other. 
A change in the cost of production of one may seriously af- 
fect values of rival products. 

lA2iXs\i2Ci\ , Principles , Bk. V., chs. 4, 6; Economics of Industry ,'&^. 
v., chs. 4, 6; Bullock, Introduction, §§ 123-129; Seligman, Prin- 
ciples, § 107; Hadley, Economics, § loi; Andrews, Institutes, § 69; 
Mill, Principles, Bk. III., ch. 16; Walker, Political Economy , pp. 
104 iii; Nicholson, Principles, Bk. III., ch. 5, § 6; Twelfth Cen- 
sus of the United States, X., pp. 725-748; Flux, Economic Princi- 
ples, pp. 65-69. 



44 Value. 

7. Monopoly Value. 

When monoply exists, value does not tend to equal margi- 
nal cost. Value tends to be fixed at that point which will 
give the greatest net returns, having due regard to the effect 
of this price upon the volume of sales and profit on the unit. 

Marshall, Principles, Bk. V., ch. 13; Economics of Industry, 
Bk. v., ch. 8, §2; Seligman, Principles, § no; Bullock, Intro- 
duction, § 201; Seager, Introduction, §t^ 112, 113; Fetter, Princi- 
ples, ch. 33, § 3; Andrews, Institutes, § 67; Nicholson, Principles, 
Bk. III., ch. 7; Elements, Bk. III., ch. 4, §§ 3-6; Flux, Economic 
Principles, pp. 69-78. 



CHAPTER VII. 
DISTRIBUTION OF WEALTH. 

A. PKELTMINARY CONSIDERATIONS. 

I. The Problem of Distribution. 

Natural resources, labor, capital and managing ability co- 
operate to produce goods and their values. The owners of 
each of these must be rewarded in order that its aid may be 
secured. How is the value of a good divided among the co- 
operating agents? How are wages determined? Why do 
they vary among individuals and over periods of time ? 
What are the normal tendencies around which market fluctu- 
ations take place ? How are interest and its differences de- 
termined ? How are rent and profits fixed ? These are ques- 
tions of function — not of individuals since the same individ- 
ual may combine two or three functions. This problem is of 
fundamental economic and social importance. 

Marshall, Principles, Bk. VI., ch. i, § i; Economics of hidus- 
try, Bk. VI., ch. i, § i; Seligman, Principles, § 151; Seager, In- 
U-odnction, §§ 30, 93; Smart, Distribution, Bk. II., ch. i; Clark, 
Distribution, ch. i; Andrews, Institutes, §§ 97-99; Nicholson, 
Principles, Bk. II., ch. i, §§ i, 1; Elements, pp. 96-100; Sidgwick, 
Principles, Bk. II., ch. i. 

2. National Income is the National Dividend. 

" The national dividend is at once the aggregate net pro- 
duct of, and the sole source of payment for, all the agents of 
production within the country: ... It constitutes the 
whole of them, and the whole of it is distributed among 
them, and the larger it is, the larger, other things being 
equal, will be the share of each of them." These shares 
are : wages, or the remuneration of labor; interest, or the 
earnings or product of capital; profits, or the income from 



46 Distribution of Wealth. 

business enterprise; rent, or the income that accrues or is paid 
to owners of natural resources for the use of them. 

Marshall, Principles, Bk. VI., ch. 2, § 6; Economics of Indus- 
try, Bk. VI., ch. 2, § 5; Bullock, hitrodnctio7i, §§ 248-250; Smart, 
Return to Protection, ch. i. 

3. All Incomes Paid from Capital Goods but not out of Capital. 

" All but the small part of income which is produced im- 
mediately before it is consumed comes . . . from the products 
of previous days' industry stored up as capital goods." But 
since a part of the product is constantly replacing these capi • 
tal goods the fund of capital is kept intact. 

Seager. Introduction, §§ 89, 93. 

4, Normal Static Laws Underlie Dynamic Conditions. 

In actual economic life, especially in modern industrial 
countries, constant changes are taking place which disturb 
the equilibrium that competition would tend to establish. 
Population increases as does capital; skill of labor and effic- 
ciency of capital goods improve; methods of agriculture, man- 
ufactures, trade constantly progress; climate is variable; and 
consumption is constantly changing. Further, competition is 
far from perfect because of monopoly, ignorance, immobility. 
Consequently changes in the shares in the Distribution of the 
National Dividend are constant; but there are working under- 
neath these changes tendencies which in an unchanging so- 
ciety would result in normal, static distribution. 

B. NORMAL DISTRIBUTION. 

I. Hypothetical Static Society. 

Imagine a society like our own except free from change 
in population, in amount of capital, in method, in skill, in 
fertility, in habits of consumption ; and one in which com- 
petition is free and universal. Capital goods would be ex- 
actly replaced, prices would be normal and " the net product 



Distribution of Wealth. 47 

and the real income of consumable goods would be identical. 
.... Real incomes will consist in such a society of the net 
product, .... the services of capital being to enable those 
who take part in production to secure at once in consumable 
form the equivalent of what they produce." (Seager). Unreal 
as such a society is, it is enough like the actual so that " we 
may say that real incomes come virtually from the net 
products of industry." 

Seager, Introduction, §§ 94, 95, 96; Clark, Distribution, ch. 25; 
Marshall, Principles, Bk. VI., ch. i, §§ 2-5; Economics of Indus- 
try, Bk. VI., ch. I, are somewhat difficult, but suggestive ac- 
counts of static conditions and their bearing on actual distribu- 
tion. 

2. Profits in a Static, Perfectly Competitive Society. 

In such a society profits except as equivalent to the wages 
necessary to secure management would disappear, since all 
gains due to change and fortuitous conditions would be absent 
and competition would prevent any individual getting, for 
any length of time, more than that fair reward for actual effort 
which another might get. 

Seligman, Principles, pp. 354-356; Seager, Introduction, % 99; 
Carver, Distribution, pp. 286-287; Clark, Distribution, pp. 70, 
III, 112, 179, 290, 291, 405, 410, 411. 

3. Wages in a Static, Perfectly Competitive Society. 

In such a society wages would equal final productivity of 
labor (marginal productivity) of the particular grade, since 
" if there is free competition and if all the laborers do their 
allotted tasks equally well, the share of the product ascribable 
to any of the workmen must be equal to the additions made 
by the last, or marginal, laborer actually at work. ' ' (Selig- 
man). ' ' Each individual laborer gets as wages approximately 
the equivalent of the amount which he individually can add 
to the product of the group to which he belongs." (Carver). 
Marginal productivity itself, however, depends upon numbers. 
Where will this margin be located ? Assuming what would 



48 Distribution of Wealth. 

quite certainly be true, that in such a society a certain stand- 
ard of living will be held quite tenaciously through an accelera- 
tion or retardation of the marriage and birth rate ; and 
recognizing that the cost of producing a certain efficient 
supply of labor is equal to this standard, it may be said that 
the normal tendency of wages is to equal the cost of securing 
or producing labor. 

Marshall, Principles, Bk. VI., cli. i, §§ 2-8, 10; ch. 2, g§ 1-3; 
Economics of Industry, Bk. VI., ch. i, §§ 2-6, 8; ch. 2, i?§ 1-2; 
^€i\^ma,n. Principles, % 175; Flux, Economic Principles, ^^. 118- 
135; Carver, Distribution, pp. 135-15S; Clark, Distribution, chs. 
7-8; Fetter, Principles, ch. 23, § 3; Gide, Principles, pp. 509-514. 

4. Interest in a Static, Perfectly Competitive Society. 

In such a society interest would equal the final productivity 
of a unit of capital, since each " will push the investment of 
capital in his business in each several direction until what ap- 
pears in his judgment to be the margin of profitableness is 
reached." (Marshall). Were there perfect mobility of capi- 
tal the marginal productivity of capital in all trades would be 
the same because of the immediate transfer of marginal capi- 
tal from less to more productive uses. Marginal productivity 
itself, however, depends upon the amount of capital. Were 
capital unlimited, there could be no interest. Where will 
this margin be located ? Obviously at that point where the 
marginal productivity (or interest) is a sufficient reward to 
induce people to save that amount which will have this mar- 
ginal productivity. That is, interest is fixed at that point 
which covers that which may be called a metaphysical cost of 
producing capital. Each piece of capital goods must as a 
rule produce not only enough for its own replacement, but 
also an amount sufficient to induce that social abstinence or 
forbearance which results in capital. Much saving is not 
under the incentive of interest, but marginal saving is. Inter- 
est tends to be fixed by a balancing of productivity and reward 
of forbearance — by demand and supply. 



Distribution of Wealth. 49 

Marshall, Principles, Bk. VI., ch. i, § 9; ch. 2, § 4; Economics 
of Industry, Bk. VI., ch. \,%T, ch. 2, §3; Seligman, Principles, 
§§ 167-168; Carver, Distribidion, pp. 220-256; Clark, Distribution, 
ch. 12; Gide, Principles, pp. 573-577. 

5. Division of the Whole Product in Such a Society. 

In such a society since capital and labor not only co-operate, 
but compete ; and since marginal quantities of either are 
readily substituted for marginal quantities of the other when 
more efficient in proportion to cost, their marginal prices are 
relative to their efficiencies, "The law which determines 
the division of the product between labor and capital in com- 
petitive industries for a society in a state of normal equilibrium 
is, therefore, that each receives the share that it produces." 
(Seager). 

Seager, Introductio7i,%% 149, 150; MarshaW, Principles, /Sk.. VI., 
ch. I, §§ 6, 7, 8; Economics of Industry, Bk. VI., ch. i, §§ 6, 7, 8; 
Clark, Distributio7i, chs. 11, 12. 

6. Summary of Normal, Static Distribution. 

The same tendencies hold for the prices of productive fac- 
tors as for the prices of commodities, that is, wages and in- 
terest tend to equal marginal productivity; but wages and in- 
terest in a static society would have a close relation to cost of 
securing the supply of labor and of capital. " Supply price 
and demand price tend to be equal: wages [and interest] are 
not governed by deiTiand price nor by supply price, but by 
the whole set of causes which govern demand and supply." 
(Marshall). The " National Dividend is at once the aggre- 
gate net product of, and the sole source of payment for, all 
the agents of production within the country; . . . the 
larger it is, the larger, other things being equal will be the 
share of each of them." An increase in the amount of any 
one agent will be an advantage to all by increasing the na- 
tional dividend; but may be disadvantageous to the particular 
agent, since the lowering of its marginal productivity may 
more than offset its share of the increased total production. 

Marshall, Principles, Bk. VI., ch. 2, §§ 6-10; ch. 11; Economics 
of Industry, Bk. VI., ch. 2, §§ 5-10; ch. 11. 



50 Distribution of Wealth. 

C. PROFITS. CONDITIONS WHICH PREVENT 
THE REALIZATION OF STATIC CONDI- 
TIONS AND NORMAL DISTRIBUTION. 

L Changes in Economic Conditions. 

a. The hypothetical results described under "B " are con- 
ditioned upon the attainment and maintenance of equilibrium. 
In actual life there are constant changes taking place, some 
gradual, some radical, which prevent such equilibrium, so that 
actual distribution only tends toward the method described. 
Such changes are increases in population and in capital; im- 
provement in skill of labor and the efficiency of capital goods; 
better organization of labor and capital; changes in habits of 
consumption, variability of climate and season; and exhaus- 
tion of natural resources. 

b. There result changes in prices which make market 
prices higher or lower than the normal prices composed of 
wages and interest. Hence appear, even under sharply com- 
petitive conditions, entrepreneur'' s gains or losses. Such 
gains are profits in the strict sense and continue a long or 
short time according as competition can quickly or slowly re- 
store normal conditions. 

Seager, Ititjvdiictiou, pp. 169-173; 177-187; Marshall, Princi- 
ples, Bk. VI., ch. 7, § i; cli. 8, >^§ 7, 8, 9; Economics of hidustry, 
Bk. VI., ch. 7, § I ; ch. 8, §§ 5, 6; Seligman, Principles, g§ 152- 
153; Carver, Distribution, pp. 268-278; Bullock, Introduction, 
§291; Clark, Distribution, ch. 5, 25; Sidgwick, Principles, Bk. 
II., ch. 2. 

2. l\1onopolistic Conditions. 

a. Normal distribution depends upon the existence of com- 
petition. Since competition is frequently restricted by com- 
bination, some prices are determined in accordance with the 
law of monopoly value above normal value. Hence result 
monopoly profits. 

b. These monopoly profits, so far as they are due to prices 
higher than those which would prevail without monopoly. 



Distribution of Wealth. 5 i 

affect cost of living and diminish the real incomes of other 
factors of production. 

Seager, Introduction, §§ 109-113; Seligman, Principles, § 156; 
Bullock, Introduction, § 292. 

D. WAGES. 

I, Definitions and Discriminations. 

a. ' ' Wages include all earnings assigned to men for their 
work from lowest piece wages to highest annual salaries and 
' wages of management. ' ' ' They also include the return 
which comes directly to a man for his labor. 

b. Time wages are paid for a quantity of time. Piece 
wages are paid for a quantity of result. The term efficiency 
wages may be used to describe " earnings measured — by the 
exertion of ability and efficiency required of the laborer." 
The relative advantages and disadvantages of time and piece 
wages depend upon the conditions of the particular trade, 
factory or job. The labor-cost under each tends to be the 
same. Efficiency wages tend to be equal in the same dis- 
trict unless much expensive machinery is used. 

c. " Real wages of labor may be said to consist in the 
quantity of the necessaries and conveniences of life that are 
given for it ; its nominal wages in the quantity of money." 
Real wages depend upon the nominal wages as modified by 
changes in the value of money, trade expenses, allowances, 
privileges, supplementary earnings, regularity of employment, 
certainty of success. 

Marshall, Principles, Bk. VI., ch. 3; Economics of Industry , Bk. 
VI., ch. 3; Bullock, Introduction, §§ 277-279; Seager, Introduc- 
tion, %\2)5'> '^e^tte^r, Principles, ch. 23, §§ i, 2; Andrews, Insti- 
tutes, §113. 

2. Industrial Grades. 

There are infinite variations of efficiency from that of the 
most worthless of the ' ' residuum " up to that of the ablest 
''captains of industry." For convenience five classes may 



52 Distribution of Wealth, 

be recognized : unusual managing, artistic and professional 
ability; ordinary business, artistic and professional ability, 
and highly skilled mechanical ability; ordinary mechanical 
and clerical ability; unskilled manual labor ; the inefficient. 
Throughout history and over a great part of the world at 
present each grade has been recruited largely from its own 
children. In modern industrial democratic countries and 
especially the United States this is not so true ; but it is de- 
batable whether movement from grade to grade is now as 
easy as in our earlier history. 

Seager, Introduction, §§131, 138; Marshall, /';7;/rz)!»/^5, Bk. IV., 
ch. 6, §§ 5-8; Economics of Industry, Bk. IV., cb. 6, § 5. 

3. Demand and Supply Determine the Wages of These " Non- 
Competing Groups." 

Transition from one grade to another being difficult and 

slow, wages are determined by the demand for and supply of 

labor of each grade. These grades cannot easily compete 

with each other. Thus are explained alike the wages of a 

great corporation president and of a laborer displaced by a 

machine. 

Seager, Introduction, pp. 228, 240; Bullock, Introduction, § 286; 
Cairnes, Leading Principles, pp. 57-73- 

4. Causes of Differences in Real Wages. 

Competition moving labor from less to more productive 
trades, processes and regions, would tend to produce equality 
of wages were it not for certain hindrances and peculiarities 
in the action of demand and supply in reference to labor. 
Such are: 

a. Differences in native ability which, with full allowance 
for environmental influence, are most striking. 

b. Immobility of labor. In spite of growing ease and 
cheapness of transportation, unwillingness of laborers to leave 
certain regions leads to relative over-supply and under-supply 
in certain districts and trades. 



Distribution of Wealth. 53 

c. The efficiency which enables men to enter the more 
highly paid trades depends largely upon the investment of 
wealth in giving right training; but this expenditure must be 
made largely by those who will not benefit by the result. 

d. Labor is perishable. The laborer must sell his labor 
at the best price obtainable or lose it entirely. His urgent 
need leads to bad bargains. 

e. Labor is at a disadvantage in bargaining as compared 
with the employer in respect to reserve power, competitive 
skill and knowledge of the market. 

f. Supplies of labor are slowly produced so that a relative 
deficiency is slowly made up and a relative over supply slowly 
removed. This is an effective cause of difference in propor- 
tion as the period necessary for acquiring the requisite 
skill is short or long. 

Marshall, Principles, Bk. VI., chs. 4, 5; Economics of Industry, 
Bk. VI., chs. 4, 5; Seager, Introduction, § 134; Seligman, Princi- 
ples, p. 413; Bullock, Introduction, § 294; Pierson, Principles, pp. 
332 340; Mill, Principles, Bk. II., ch. 14; Nicholson, Principles, 
Bk. II., ch. 11; Pleinents, Bh. 11., ch. J ; Smith, Wealth of Nations, 
Bk. I., ch. 10. 

5. Further Causes of Differences in Money Wages. 

Even when the net advantages and disadvantages of wages 
in different trades are the same, nominal differences may re- 
sult from the following causes : 

a. Cost of living. A large money wage may yield no 
more than a small one if the expenses of living are large. 

b. Cost of learning trade. 

c. A trade may have relatively small money wages because 
of the leisure or other attractions connected with it. 

d. Danger incurred. A high wage may be partly com- 
pensation for risks involved in the calling. 

e. Social esteem. Social esteem or prejudice may account 
for difference in wages. 



54 Distribution of Wealth. 

/. A high money wage for the day, week or year may not 
involve high wages for the entire life of tlie worker, if work 
be irregular or if the length of effective working life be short. 

o. A low nominal wage may be accounted for by unusual 
chances for great success or certain promotion. 

Seager, Introduction, ^ 136; Marshall, Principles, Bk. VI., ch. 
3. §§ 3-8; Economics of Industry, Bk. VI., ch. 3, §§ 3, 4; Bullock, 
hiiroduction, % 287 ; Seligman, Principles, § 17S; Carver, Distribu- 
tion, pp. 179-184. 

6. Reasons for the Continuance of DifTerenoe in Real Wages. 

a. Differences in marginal productivity tend to fix wages. 
These differences in productivity are due to unequal abilities 
which are the result of all those facts of heredity and environ- 
ment which affect efficiency. In the environment may be 
emphasized such influences as home surroundings and standard 
of living, length and character of school training, child labor, 
caste and social prejudice, and all those influences considered 
in chapter v., C, 3. 

b. The continuance of a certain standard of wages is large- 
ly due to these wages which fix the standard of living, which 
in turn largely determine efficiency upon which productivity 
and, in the long run, wages depend. Such is the circle of 
influence. 

Seager, Introduction, %% 137, 138. 

7. Influence of Wages on Supply of Labor. 

Wages in a static society would be determine4 by supply 
as well as by demand. Does the supply of efficient labor re- 
spond in real life to changes in demand as shown in wages? 

a. Increased remuneration stimulates to increased exer- 
tion. 

b. Increased remuneration stimulates to better prepara- 
tion and hence greater efficiency. 



Distribution of Wealth. 55 

c. Increased wages, so far as they improve the standard of 
living, not only increase efficiency but increase the number of 
the population surviving to productive age. 

d. Increased wages tend over a great part of the world to 
accelerate marriage and to increase the birth rate, although in 
modern industrial countries this seems to be a cause of fluctu- 
ation 3 bout a gradually decreasing birth rate that has come 
with higher standards of material comfort. 

e. All things considered, then, an increase in wages 
above the prevailing standard of living (which is in a sense 
the cost of production of labor) tends to increase the supply 
of efficient labor. This standard of living is not, however, a 
fixed minimum of existence but a more or less elastic stand- 
ard held with varying degrees of tenacity by different groups 
and individuals. Trade Unionism tries to make this stand- 
ard of living universal and permanent. It tends steadily up- 
ward largely because of social action, 

Marshall, Principles, Bk. VI., ch. 2, §§ 1-3; Economics of In- 
dustry, Bk. VI., ch. 2, §§ I, 2; Seager, Introdtictton, §§ 160-164; 
Seligman, Principles, %% 174, 177; Carver, Distribution, pp. 164- 
179; ^yxWoizk., Introduction, %i'i/\; Smart, Distribution, Bk. II., 
ciis. 14, 16, 17, 18; Fetter, Principles, ch. 21; Vi&rson, Principles, 
pp. 315-331; Webij, Industrial Democracy, pp. 632-643. 

8. Conclusion as to Wages. 

In our actual dynamic society wages tend as in an imagin- 
ary static society to be fixed by productivity and the standard 
of living but very slowly and inaccurately. Since the econ- 
omic changes of modern times are constantly following one 
another, even that adjustment which might be brought about 
slowly is never realized. Many wages are higher or lower 
than our only standard of justice, merit, would set. Even 
though men are rewarded according to the values they pro- 
duce, these values are, because of social changes, variable and 
even fickle in some lines of production. Though the ten- 
dency is for men to be rewarded according to the efforts they 



56 Distribution of Wealth. 

put forth and according to the skill they have acquired, they 
frequently are not. Here then is the basis for the charge that 
our distribution involves social injustice. But these changes 
"largely neutralize one another .... and cause the actual 
form of society to hover much nearer to the theoretical 
static form than would be possible if these influences worked 
separately." (Clark,) Further it is the profits resulting to 
e?itreprenetirs from these changes which are the incentive to 
economic improvements, the results of which, in the long 
run, go very largely to labor. 

Clark, Distribution, ch. 25; Marshall, Principles, Bk. VI., ch. 
2; ch. 5, §§ 4-7; Economics of Industry, Bk. VI., ch. 2; ch. 5, §4; 
"Si^W^-mdin^ Principles, %% 176, 179; Seager, Introduction, §§ 155- 
157; Smart, Distribution, Bk. II., entire, but especially ch. 13, 
19, 28. 

9. Wages Not Arbitrary. 

The departures of distribution from the principle of reward 
according to merit are not due to arbitrariness but to general 
social influences. Wages are social assessments of worth as 
judged at the time — often capricious and fickle but very 
largely on a sound basis. 

Smart, Distribution, Bk. II., chs. 1-13, and especially ch. i, an 
entertaining piece of sound argument. 

E. INTEREST. 

I. Definition and Discrimination. 

a. Interest, in form paid for the use of money, is really 
paid for the use of capital which the money represents. In 
Economics the term refers to the earnings of capital, whether 
a loan be involved or not. 

b. The rate of interest on ordinary long loans is not 
affected by the supply of money, but in financial centers since 
actual cash is often needed to meet obligations, the rate of 
interest on loans is directly affected by supply. 



Distribution of Wealth. 57 

c. That which seemingly is a high rate of interest some 
times conceals wages of management. 

Seligman, Principles, pp. 392, 395; Bullock, Introductio?t, pp. 
389, 396-39S; Marshall, Principles, Bk. VI., ch. 6, §4; Ecojiomics 
of Industry, Bk. VI., ch. 6, § 2; Fetter, Principles, ch. 16; An- 
drews, Institutes, §§ 108, iii; Gide, Principles, pp 568-572; Pier- 
son, Principles, pp. 225-232. 

2. Normal Tendency of Interest Approximated In Actual Society. 

Since the mobility of capital is much greater than that of 
labor, actual interest approximates the normal much more 
closely than do wages. The transfer of capital from less to 
more productive employments is brought about mainly by the 
direction of the replacement fund. Capital goods which do 
not earn, in addition to their replacement fund, current rates 
of interest are not replaced, and the portion of capital thus set 
free is turned into capital goods of the sort that promise the 
greatest earnings. Because of this mobility of capital, there ig 
an approximation of interest rates in different employments to 
a general rate. 

Seager, Introduction, §§ 142, 147, 156; Carver, Distribution, pp. 
214-215; Distribution, ch. 18. 

3. Differences in Economic Interest. 

a. In spite of this tendency toward a general rate of inter- 
est, different capital goods are earning different rates because, 
an investment of capital once having been made with any 
degree of specialization and permanency, it cannot be with- 
drawn immediately. Any change in economic conditions 
may make the rate above or below the current rate. 

b. Differences in risk may also require larger earnings to 
attract necessary capital, although this apparently higher rate 
of interest is commonly a larger replacement fund. So social 
disrepute of trade may require a higher rate of interest to 
attract capital to it, although such higher rate is almost uni- 
versally composed partly of wages of management. 



58 Distribution of Wealth, 

c. There are differences in marginal- productivity of capi- 
tal in different localities because of the limitatio of supply 
of capital in certain regions. 

Seager, Introduction, §§ 143-145; Flux, Economic Principles, 
pp. 90 96. 

4. Differences In Loan Interest. 

Competition tends to make a uniform rate of interest pre- 
vail in the same loan market. So perfectly does competition 
work that a difference of rate on loans of the same duration 
is evidence of difference in security. In addition to differ- 
ences due to risk there are differences in loan rates in different 
regions. The money market is an international one. 

Seager, Introduction, § 146; Seligman, Principles, § 166; Bul- 
lock, Introduction, pp. 394-395; Marshall, Principles, Bk. VI., 
ch. 6, §§ 4-5; Economics of Industry, Bk. VI., ch. 6; Andrews, 
Institutes, %% 109-110. 

5. Tendency of Interest. 

a. With progress in civilization (which involves increase 
of wealth and capital, not only absolutely but relatively to 
labor and natural resources) the total product of capital in- 
creases but its marginal productivity decreases. The rate of 
interest tends downward, but the quantity and quality of capi- 
tal are bettered to the advantage of the other factors in pro- 
duction. 

b. There is no reason to think that interest will fall to noth- 
ing, because every decrease in the rate increases demand for 
capital ; and because every decrease in the rate tends some- 
what to discourage saving. 

Seligman, Priticiples, §§ 169, 170; Seager, Introduction, § 302; 
Gide, Priticiples, pp. 577-581; Pierson, Pri7iciples, pp. 213-217, 

6. Regulation of Interest. 

Interest, prohibited in the Middle Ages, was at first allowed 
in certain contingencies and then generally with a limitation 
of the rate. Such regulation still prevails in many American 



Distribution of Wealth. 59 

states but is contrary to the general tendency toward econ- 
omic freedom. It is not only easily evaded but tends actual- 
ly to increase the rate to the necessitous borrower. Where 
equality in bargaining does not exist, regulation seems to 
have some justification. 

Seligman, Principles, § 171; Bullock, Introduction, § 268; Fet- 
ter, Principles, p. 135; Hadley, Economics, §§ 155-157; Andrews, 
Institutes, § 112. 

7. Justification of Interest. 

For varying reasons in different ages objection has been 
made to the rightfulness of interest. Consideration of this 
topic is not within the scope of this course, but it should be 
noted that interest is now justified on the ground of social 
utility. The capital which is essential to progress would not 
be accumulated without tlie incentive of interest. Although 
the motive of saving is personal gain, the result is general ad- 
vantage. 

Bullock, Introduction, § 268; Seager, Introductiofi, § 299. 

F. RENT. 

I. Definition and Discrimination. 

Rent is the share of income that goes to the owner of any 

natural agent. Economic rent, or the real earnings of a natural 

agent, must be distinguished from contract rent, or the sum that 

one pays in return for the right to receive the earnings of a 

natural agent. The term rent is frequently extended to the 

sum paid for the use of other things than natural agents. 

Seager, Introduction, § 119; Seligman, Principles, § 159; Fet- 
ter, Principles, ch. 8; Nicholson, Principles, Bk. II., ch. 14, g i; 
Elements, Bk. II., ch. 10, § i. 

2. The Basis of Rent. 

a. There would be no rent were there a superabundance 
of best land. 

b. There would be no rent if unlimited applications of 
capital and labor to land produced the same proportionate 
return. 



6o Distribution of Wealth. 

c. Because of the scaricty of best land and because of the 
fact of diminishing returns, the necessary food and raw mater- 
ial demanded by increasing population can be secured only 
by resort to poorer lands or by less productive applications of 
labor and capital to the best land. The effective motive in 
either case is the higher price of the produce of land result- 
ing from increasing demand. 

d. Since all equal units of a crop will have equal value in 
the same market, the price, fixed at the marginal cost of pro- 
duction, will yield a surplus on that part of the crop raised at 
relatively greater advantage. This surplus arising from su- 
perior productivity of land above the extensive or intensive 
margin ot cultivation is economic rent. 

e. The income of permanent improvements obeys the 
same law as income ascribable to the land itself. 

Seagar, Introduction §§ 63, 120-122, 127; Bullock, Introduc- 
tion, §§ 272, 273; Seligman, Principles, I 160; Marshall, Princi- 
ples, ii'k. IV., ch. 3; ^§ 2-6; Bk. VI., ch. 9; Economics of Indus- 
try, Bk. IV., ch. 3, §§ 2-5; Bk. VI., ch. 9; Carver, Distribiction- 
tion, pp. 185-202; Gide, Principles, pp. 582-590; Davenport, Out- 
lines, pp. 75-85; Pierson, Principles, pp. 8492; Flux, Economic 
Principles, pp. 97 105; Mill. Principles, Bk. II., ch. 16, §§ 1-5; 
Nicholson, Principles, Bk. II, ch. 14; Elements, Bk. II, ch. 10; 
Walker, Political Economy, pp. 193-200. 

3. The Relation of Rent to Prices. 

a. Generally speaking rent is the result of price — not 
price the result of rent. 

b. In the case of a crop raised in part on actual no-rent 
land, rent (that is the disposition of the surplus) does not in- 
crease price, although this surplus, being a part of supply, 
helps fix the price. 

c. "More commonly the marginal land for any particular 
use itself affords a rent because, though marginal for the given 
use, it is above the margin for some other use to which it 
might be applied." (Seager.) In such a case the marginal 



Distribution of Wealth. 6i 

rent is an element in price, but the differential rent due to the 
use of better land for this particular purpose does not increase 
price. 

d. The intensive margin of cultivation is a no-rent mar- 
gin. The price of the commodity thus raised intensively is 
not increased by the payment of rent but is determined by 
wages and interest at the margin. 

e. Wages and interest are necessary to secure the supply 
of labor and capital. They are therefore necessary elements 
in cost of production. " Rent, however, is wholly a result 
of production ' ' and not a causae. 

Seager, Introduction, § 127; Seligman, Principles, § 161; Bul- 
lock, Introduction, % 274; Marshall, Principles, Bk. V., ch. 8 
Economics of Industry, Bk. V., ch. 3, § 8, and Appendix C; Car 
ver, Distribution, pp. 206-210; Smart, Distribution, ch. 26 
Clark, Distribution, ch. 23; Pierson, Principles, pp. 93-99; Flux 
Economic Principles, pp. 109-114; Mill, Principles, Bk. II., ch 
16, g 6; Hobson, Distribution, ch. 4, pt. i. ; Andrews, Institutes 
§ 105; Walker, Political Economy , pp. 200-202. 

4. Rent of Water Power and Mines. 

These rents are determined similarly to that of land. In 
the case of water power the marginal power used must yield 
a return large enough to pay interest on the investment of 
capital necessary for utilization. The rent of water-power is 
constantly limited by the cost of the possible substitutes for 
it. 

In the case of mines the product does not renew itself 
Hence the marginal mine ought rationally to be one which 
paid not only working expenses but enough to compensate 
for exhaustion of the deposit. Practically on account of the 
speculative nature of most mining there are no-rent mines and 
"the rent of better mines is measured up from them as a no- 
rent margin. " (Seager.) 

Seager, Introduction, §123; Marshall, Principles, Bk. V., ch. 
8, § 6; fIux, Eco7iomic Principles, p. 108; Nicholson, Principles, 
Bk. II., ch. 14, § 5; Elements, Bk. II., ch. 10, § 7; Walker, Poli- 
tical Economy, pp. 212-216. 



62 Distribution of Wealth. 

5. Qualifications of the Law of Rent. 

a. The rotation of crops complicates but does not contra- 
dict the law of rent. The product of the entire period of ro- 
tation must be divided among the years to find the annual 
product. 

b. The variations of weather and price affect returns for a 
year ; but in stating law of rent the average return is assumed . 

c. Situation, transportation facilities or any other charac- 
teristic that affects utility, is as important as fertility in deter- 
mining rent. 

Seager, Introduction, §§ 124, 65; Bullock, Introduction, % 271. 
6. Rent and the Land Owner. 

a. If the land is rented, contract rent tends to approxi- 
mate the economic rent more or less closely according to the 
extent that competition prevails. Custom, a feeling of obli- 
gation on part of the owner or other cause may leave part of 
the rent in the hands of the worker. • 

b. If the land is worked by the owner, the economic rent 
accrues to him. It is not always differentiated by him from 
other parts of his income. 

c. The capitilization of the rent at the current rate of in- 
terest fixes the selling price of land. 

d. In some regions rents are not competitive but are fixed 
by custom. Such are the system of farming on shares and 
the 77ietayer system. 

Marshall, Principles, Bk. VI., ch. 9, §§ 6, 8; ch. 10; Economics 
of Industry, Bk. VI., chs. 9, 10; Se^&ger, Introduction, %% 126, 128; 
Bullock, Introduction, ^^270, 275; SeVigman, Principles, §163; 
Vetter, Principles, ch. 15; Gide, Principles, pp. 606-612,; Flux, 
Economic Principles, pp. 114- 117. 

7. Tendency of Rent. 

Other things remaining the same, an increase of population 
or of the standard of living raises rents. This is true both of 



Distribution of Wealth. 63 

rural and urban lands. This tendency may be checked by 
improvements in production or transportation which increase 
supply. 

Seligman, Principles, §162; BviWock, Introduction, % 2^6 ; Gide, 
Principles, pp. 590-593; Davenport, Outlines, pp. 86-92; Flux, 
Economic Principles, pp. 11 2-1 14; Pierson, Principles, pp. 107- 
120. 

8. Justification of Rent. 

Private property in land rent is attacked by different 
classes of social critics. "The question of the justification of 
rent is not one of its existence but of its disposition." While 
from the individual point of view there seems much ground 
for objection to individual appropriation of that which is in 
part the gift of nature and in part social product, long ex- 
perience shows private ownership of land has all in all ad- 
vanced social welfare. Some of the "unearned increment" 
(not, however, peculiar to land) might be heavily taxed with 
social advantage. 

Seligman, Principles, § 164; Seager, Introduction, % 299; Smart, 
Distribution, pp. 306-308; Gide, Principles, pp. 593 600. 

G. CONCLUSION AS TO ACTUAL DISTRIBU- 
TION. 

a. The rewards of the factors of production are derived 
from and depend upon the values of the commodities they 
produce. But in a more fundamental sense the values of 
commodities depend upon these rewards of the factors of pro- 
duction. The values of commodities and the shares in distri- 
bution are but two ways of regarding the same sum. The 
National Dividend is the National Income. 

b. The same fundamental principles determine the values 
of commodities and of the factors of production. In each 
case it is the marginal utility ; but the margin is fixed by the 
forces of supply or in other words by the cost of production. 
Both in the case of commodities and of the factors of produc- 



64 Distribution of Wealth. 

tion, the departures of market, or actual, values from normal 
values are to be explained similarly. 

c. Even in our actual changing society distribution is not 
accidental or arbitrary ; nor is it under the control of the 
powerful ; but tends to approximate to the principle of re- 
ward according to deserts. But the rapid changes in modern 
society, the interference with the perfect working of compe- 
tition, the monopolistic conditions that prevail and the im- 
mobility of labor due largely to its not being a mere com- 
modity, result in many departures from a desirable result. 
There is, then, opportunity for social effort to minimize these 
departures from an ideally just distribution. The Labor 
Problem deals with such topics. 



CHAPTER VIII. 

CONSUMPTION. 

(References will be found at the end of the chapter. ) 

I. Definition and Discrimination. 

Consumption is the destruction of utility. Economic con- 
sumption is the destruction of utility for the sake of advant- 
age; it is either unproductive of wealth or reproductive of 
wealth. Uneconomical consumption is waste. 

2. Dependence of Consumption on Utility. 

a. A thing has utility because of the psychological condi- 
tion of the consumer. Hence the consumption of a person 
depends upon his psychological organization and character. 

b. " The art of consumption consists in knowing when to 
leave off in one thing and to begin in another. The ideal of 
consumption is attained when the marginal utilities of the ar- 
ticles consumed are all equal." (Nicholson). 

3. Dependence of Consumption on Price. 

a. Consumption is directly dependent upon price and 
therefore constantly limited or stimulated by all changes in 
methods of agriculture, manufacture, transportation and com- 
munication. 

b. This dependence of consumption on price frequently 
leads people to be affected unduly by prices. Useless things 
and articles of poor quality are bought because of low nomi- 
nal price. The desirability of intelligence and self-control 
are evident. 

c. Price, however, has significance only when compared 
with income. Normally, income not only does but should fix 



66 Consumption. 

consumption, since income represents a person's production 
of utility as socially estimated. Ought a person to consume 
more utility than he produces ? It should be remembered 
that many most valuable social services are not directly paid 
for. 

4. Dependence of Consumption on Distribution. 

The degree of equality in distribution in a social group 
shapes its consumption. The same group income on an ante- 
bellum plantation and a Brook Farm would produce very dif- 
ferent results. Communal or social consumption is economi- 
cal of wealth- but economy is not desirable at the expense of 
broader social considerations. 

5. Effect of Consumption on Production and its Metliods. 

a. The stimulus to economic progress and industry is 
found in wants. A large proportion of all consumption tends 
directly or indirectly to further production of wealth. 

b. Where capital and labor are not fully employed, de- 
mand for commodities may increase employment of labor. 

c. Ordinarily, demand directs rather than employs labor. 
The mere destruction of wealth does not produce wealth. 
The consumer determines the form of wealth produced. De- 
mand for luxuries is no more a demand for labor than any 
other expenditure. The direction of labor into certain lines 
results in a. pennanent medins of further production or enjoy- 
ment, in contrast with that which is merely transitory. The 
consumer determines whether a beautiful or an ugly thing shall 
be produced. He chooses between a rapid or slow destruc- 
tion of wealth. 

d. Consumers determine the numbers employed in each 
occupation. Some of these occupations are educational and 
tend to encourage development of productive skill; while 
others are debasing and not productive of wealth. 

LOFC. 



Consumption. d'j 

e. Consumers determine industrial methods. Whetlier it 
be sweatshop or factory; child labor or skilled adult labor; 
hand or machine; craftsmanship or highly specialized labor, 
is for the consumer to decide. The department store and 
the trust are due to the patronage of the public. 

6. Relation of Consumption to Accumulation. 

Saving is in reality the accumulation of wealth, most of 
v/hich becomes, by investment, capital. If all should save in 
an extreme degree, there would be a falling off in demand for 
the very goods which the saving would help produce. The 
right proportion between saving and consumption is attained 
automatically through price, wages and interest. At present 
the greatest need is an increase of expenditure for the promo- 
tion of efficiency in workers. 

7. Wasteful Consumption. 

There is much waste of Avealth due to the choice of the 
perishable rather than the durable ; to imperfect utilization ; 
and to individual rather than social ownership of certain 
forms of wealth. Not all high prices involve great cost. 

8. Ethical Aspects of Consumption. 

a. Because of the reaction of the use of wealth on 
character, it is a profoundly ethical question what one buys 
and consumes. 

b. Even more important is the effect of one's consump- 
tion on the lives of others. Because of the complicated 
nature of our productive system, the purchase of an article 
which may in no way injure its consumer, may involve 
physical, intellectual, artistic and moral debasement to others. 
Although for the most part unconsciously, there is, perhaps, 
no way in which the average person influences the lives of 
others more constantly than by his expenditure. Unneces- 
sary personal service, degrading occupations, long hours and 
bad sanitary conditions in store and factory, the sweatshop, 



68 Consumption. 

child labor and many other industrial evils could not exist 
were consumers aroused to their ethical obligations and or- 
ganized so that they might be informed. The Consumers' 
League aims to meet this need. Labor Legislation and 
the Trade Union Label are further forces in this direction. 
As Democracy in its social sense, or as Miss Adams puts it, 
"identification with the common lot," prevails, the aroused 
conscience of the consumer will be a great force working for 
social advancement. 

9. Consumption Reflects Social Progress. 

The civilization of every period is largely shown by its 
consumption — its buildings, weapons, utensils, objects of 
art, clothing, etc. The costumes of the different classes in 
the middle ages were a reflection of the constitution of the 
society of the time. The disappearance of these distinctive 
caste costumes is a part of our democratic tendency. That 
alleged "aping of their superiors" which leads those of small 
incomes to dress like the well-to do is but a striving to realize 
that Christian Democracy which most profess. 

Statistics of consumption throw much light on the question 
of the progress of the working classes. 

Seligraan, Principles, % 228; Seager, Introduction, §§ 43-46; 294, 
295; Marshall, Principles, Bk. III., ch. 6, §§ 4, 5; Eco7iomics of 
Industry, Bk. III., ch. 6, 4^3; Fetter, Principles, chs. 40, 41 ; Gide, 
Principles, Bk. V. ; Bullock, Inlroductiott, g§ 65 68; Andrews, In- 
stitutes, %% ^o, 124-131; Davenport, Outlines, pp. 330-344; Ely, 
Outlines, Pt. IV.; Walker, Political Economy, Pt. V.,cli. 3; Mill, 
Principles, Bk. I., ch. 3, §§ 46; Hadley, Economics, pp. 318-335; 
Bastiat, Essays on Political Economy, Essay " That which is seen 
and that which is not seen"; Palgrave, Dictionary, articles Con- 
sumption and LuA'ury ; Iveslie Stephen, Social Rights and Duties, 
Essay on Ivuxury; de Laveleye, Z//.i-«r_j/ ; Elements of Political 
Economy, pp. 243-264; Thompson, T/ie Purse and the Conscience; 
VsLwce-ii, 3Ianual of Political Economy, -pYi- 19-29; Ruskin, Time 
and Tide, Lecture 2nd; Alunera Pulveris, ch. 6; Crouni of Wild 
Olive ; A foy For Ever \ Unto This Last ; Say, Treatise on Politi- 
cal Economy, Bk. III., chs. 4, 5; Smart, Studies in Economics, 
chs. 8, 9, 10; Taylor, Exercises in Political Economy, ch. 9; 
Richardson, The Woman Who Spends; Blatchiord, Merrie Eng- 
land, ch. 23; Ely, Problems of To-day, ch. 15; Devas, Political 



Consumption. 69 

Economy, pp. 6-7, 21, chs. 6, 7; Roscher, Principles of Political 
Economy, Vol. II., pp. 221-252; Allen, Democracy and Diamonds, 
Contemporary, 59 :666; Adams, 77z^ Social Mittistry of Wealth, 
Int. Jour, of Ethics, 4:173; Davidson, Luxury and Extrava- 
gance, Int. Jour, of Ethics, 9 :54; Devas, 77?^ Moral Aspect of 
Consumption, Int. Jour, of Ethics, 10:41; Greg, What is Culpa- 
ble Luxury? Contemporary, 21 : 216; Smith, Mr. Greb on Culpa- 
ble Luxury, Contemporary, 22:126; de Laveleye, Morals of 
Luxury, Pop. Sci. Mon., 28:669; Leroy-Beaulieu, The Office of 
Luxury, Pop. Sci. Mon., 47 : 25; The Social Function of Wealth, 
Pop. Sci. Mon., 48 :829; Martin, Ls the Lavish Expenditure of 
Wealth Justifiable ? 19th Century, 44: 1024; Moran, The Ethics 
of Wealth, Am. Jour. Sociology, 6 : 823; Sidgwick, Luxury, Int. 
Jour of Ethics, 5:1; Simey, Luxury, Ancient and Modern, Econ. 
Rev., 12:146. Luxury in America, Spectator, 82:482; The 
Duties of the Very Rich, Spectator, 78:168; Culpable Luxury, 
Spectator, 77:511; Ward, The Use and Abuse of Wealth, Forum, 
2 : 549; Reports and pamphlets of the Consumers' L,eague and of 
the National Consumers' League. 



OUTLINES OF ECONOMICS 



A Syllabus foPv Introductory Study 



by 
HERBERT ELMER MILLS. Ph. D. 



PART II. 



POUGHKEEPSIE, N. Y. 
1907 



^v>V 



LIBRARY of OONGResS 

One Oouy Received 

_.CQpyiKht Entry 

CW5S A AAc. No, 

CQPY B. 



Copyright, igoy, 
Herbert Ei<mer Mills. 



ENTERPRISE PRINT, POUGHKEEPSIE. N. Y. 



These Outlines are a continuation of Part I. and with it 
cover the ground of the first year's work in this College. As 
was said in Part I. they are designed to be a guide to text- 
books and reading rather than a substitute for them. By 
economizing time that would be spent in note-taking both in 
and out of class, it is hoped that they will encourage more 
careful reflection and assimilation of the subject matter. The 
references are given to a few authorities which seemed most 
useful for the student beginning this subject. 



Depaftment of Economics, 

Vassar College, 

February, 1907. 



Outlines of Economics, 



CHAPTER IX. 

MONEY. 

I. Origin. 

a. The division of occupations made necessary exchange 
which was at first carried on by barter. Barter has serious 
disadvantages, since each article must be valued in terms of 
all others ; since many articles are not subdivisible ; and since 
there is such limited correspondence between needs and 
goods. 

b. Gradually certain articles, very generally desirable, 
were selected instinctively as media of exchange. These 
articles were frequently connected with the industry of the 
time. Skins, cattle, wheat, tobacco, salt, nails, cloth, wam- 
pum, are a few of the articles which have served as money. 

c. The qualities necessary for a satisfactory money are 
general desirability, durability, divisibility, adaptability to 
coinage, high value in proportion to bulk, steadiness of value. 
Copper, iron, lead, zinc, have served as money, but silver 
and gold have replaced all others except for very small coins. 
The very elastic demand for the precious metals and the con- 
stancy of their supply, composed of the accumulations of 
centuries, are the cause of the stability of value of gold and 
silver. 

d. Government, then, does not arbitrarily select the money 
commodities, but recognizes actual usage. Government gives 



6 Money. 

certainty and definiteness to money by establishing a standard 
of weight and fineness. Government also declares certain 
money legal tender which must then be received in payment 
of debt. 

Seager, Introduction, §§ i68, 170; Seligmau, Principles, p. 451; 
Fetter, Principles, ch. 13, § i; Bullock, Introduction, §§ 131, 132, 
^33' 135; Gide, Principles, pp. 213-218; Andrews, Institutes, 
§§ 72-75; Hadley, Economics, %% 205-207, 209; White, Money and 
JBatiking, Bk. I., ch. i; Scott, Money and Banking, pp. 15-20; 
Jevons, Money and the Mechanism of Exchange, chs. i, 4, 5, 6, 
8, 9 ; Walker, 7)/c«i?j/, ch. 2; Political Economy , pp. 120-126; Mill, 
Principles, Bk. III., ch. 7. 

2. Coinage. 

a. Coinage has undergone a long process of evolution. At 
first the quality of the metal was attested by the seal of a ruler. 
Then the weight was stamped on the coin. Successive changes 
have by gradual selection resulted in the present form of coin. 

b. Coins are "ingots of which the weight and fineness 
are certified by the integrity of designs impressed upon the 
surface of the metal." Jevons. Coinage endeavors, then, to 
fix with exactness the weight and fineness of the metal and to 
make alteration of the coin impossible without detection. 

c. ' ' Free coinage ' ' means that anyone may bring any 
amount of bullion to the mint and have it coined. If this 
work of coinage is done without charge the coinage is said to 
be gratuitous. A charge for coinage equal to the expense in- 
volved is called brassage. If more metal is kept by the 
government than is sufficient to cover cost, this deduction is 
called seigniorage. If seigniorage is deducted from legal 
tender coin the money is said to be debased, 

d. Mobility of the precious metals from monetary to other 
uses and vice versa is secured by free and gratuitous coinage. 
Desirable as this is in the case of standard coins, it involves 
expense and inconvenience without compensating advantage 
to have the lesser coins turned into bullion without loss. 



Money. 7 

Limited issues of small coins having less than their propor- 
tionate share of metal are therefore made and called sub- 
sidiary or token coinage. Such coins are usually legal tender 
to only a limited amount. 

e. The " mint price " is the amount of money which a 
given amount (usually an ounce) of metal will produce when 
coined. The mint price of gold in the United States is 
^20.67 per ounce. The bullion value of a silver dollar would 
equal the face value if silver sold at ^1.29 an ounce. The 
difference between the face and the bullion value of a silver 
dollar is seigniorage. 

Siea^&r, Introduction, ^I'ji; SeVignian, Principles, p. 452; Vet- 
ter. Principles, ch. 45, §1; Bullock, Introduction, §§ 134, 147; 
Hadley, Economics, §§ 208, 210, 211; White, Money and Bantling, 
Bk. I., ch. 2; Johnson, Money and Currency, pp. 177-188, p. 12; 
Scott, Money and Bantling, pp. 69-83; Jevons, Money and tlie 
Mectianismj)/ Exctiange, chs. 7, 13; Walker, Money, chs. 9, 10; 
Political Economy, pp. 126, 127, 143-147; Nicholson, Money and 
Monetary Principles, pp. 35-52; Principles, Bk. III., ch. 12; ch. 
13, §§ 3, 4- 

3. Functions of Money. 

a. The word money is used in different senses as the point 
of view is scientific, popular, financial, legal, or figurative. 
It may be defined as " a generally accepted material means 
of payment and medium of exchange." (Fetter). 

b. Money serves as a medium of exchange, a measure of 
value and a standard of deferred payment. 

c. As a large part of all business is based upon credit and 
carried on by credit instruments, an important function of 
money is to serve as a cash reserve to insure solvency. 

Seager, hitrodtiction, § 168; Seligman, Principles, ^ 187; Bul- 
lock, Introduction, § 146; Hadley, Economics, § 202; Fetter, 
Principles, ch. 13, § 2, 3; Johnson, Money and Currency, pp. 11- 
17; Scott, Money and Bantling , ch. i; Walker, Money, ch. i; 
Jevons, Money, etc., ch. 3; Nicholson, Principles, Bk. III., ch. 9; 
Money and Monetary Principles, pp. 13-23. 



8 Money. 

4. Value of Money. 

a. The value of money is its power in exchange. It is 
high when prices are low ; low when prices are high. 

b. The value of money is determined by the demand for 
and the supply of money. Other things remaining equal, 
diminishing marginal utility decreases the value of money as 
its quantity increases. " Demand for the money commodity 
depends [a) on the use of the commodity for other than 
monetary purposes, {b) on the amount of business, and {c) on 
the need for money as a reserve for credit operations. The 
general law of the value of money may thus be expressed in 
the equation : the volume of money multiplied by the rapidity 
of circulation is equal to the number of transactions in cash 
that are effected at a given price level." (Seligman, p. 456.) 

c. Cost of production is related to the value of money as 
it is to any other value, but its influence is felt slowly because 
the existing stock is very large compared with the annual 
production. If the level of prices is low, then production of 
the money commodity is accelerated. Also if the cost of 
production of the money commodity is decreased, its pro- 
duction is accelerated. Such increased production tends to 
continue until the value of money is equal to the marginal 
cost of production of the money commodity. 

d. Changes in value of money may proceed from a change 
in amount of goods offered for sale ; from a change in the 
quantity of the money commodity produced ; from a change 
in the relative amount of the money commodity demanded 
in the arts ; or from a change in the rapidity of circulation. 

e. Since every change in the value of money reacts upon 
business, upon the cost of living and upon obligations of debtors 
and claims of creditors, steadiness of value is most necessary. 

f. Since the relative values of other commodities are con- 
stantly changing, it is not possible to ascertain changes in the 



Money. 9 

value of money by changes in the price of one article. 
Changes in value of money are best ascertained by index 
numbers. Comparison of the weighted averages of the prices, 
at different times, of carefully selected list of commodities will 
indicate whether the general price level is rising or falling 
and consequently whether money is more or less valuable. As 
indications of changes in general well-being, index numbers 
must be used with caution since they '' deal with payments 
for products and not for services ; — with wholesale prices in- 
stead of retail ones ; — [and] are based on prices in the whole- 
sale markets nearest the point of consumption." (Hadley. ) 

g. Under free coinage the division of a precious metal 
between the arts and monetary use is determined by the 
relation of the marginal utility in one use to that in the other. 
"Equilibrium is reached when the marginal utility of an 
ounce of gold employed in the arts is equal to the marginal 
utility of the things which that ounce will buy if it is con- 
verted into money." (Hadley.) 

h. If the money supply of a country is large compared 
with that of other countries, prices in that country will be rela- 
tively high. The resulting excess of imports into that country 
will in time cause an export of money. A deficiency of 
money will cause a reverse tendency. This is commonly de- 
scribed as the International Distribution of Money. 

/. Sir Thomas Gresham (i6th century) observed that when 
such a movement of money occurred, full weight coins were 
selected for export since they were taken abroad only by weight 
while worn or debased coins were kept at home since they 
passed for face value. He enunciated the law that "bad 
money always drives out good money." This is true only 
when the country has relatively to others an excess of money. 
Thus qualified the principle explains the shipments of the 
more valuable metal from a bimetallic country and the exports 
of metallic money from a country issuing paper money in excess. 



lo Money. 

j. A deficiency of money is temporarily overcome by a 
diversion of a relatively greater portion of the monetary metal 
into monetary uses either from the new supplies or from the 
amount of the metal in use in the arts or as ornament. A 
more permanent deficiency is met, as has been shown, by in- 
creased production. 

k. A temporary relative deficiency of money in one 
country results in a rise of interest on short term loans in 
that country. This attracts money from foreign banking 
centers. Should the deficiency be more permanent or serious, 
it is overcome by the principle of the International Distribu- 
tion of Money. 

Seligman, Principles, %% 189, 190, 192; Seager, Introduction, 
§§ 172, 193-200; Bullock, Introduction, §§ 137-142, 145, 147-150, 
152-154; Hadley, Economics, '^% 216-229; Johnson, Money and 
Currency, pp. 17-33, 103-134, '194-201; Gide, Principles, pp. 223- 
227, 237-241; Fetter, Principles, -p-p. 436-447; Walker, Political 
Economy, pp. 127-142; Money, chs. 3, 4; Nicholson, Principles, 
Bk. III., chs. 13. 14, 17; Mill, Principles. Bk, III., chs. 8, 9,19, 
20; Nicholson, Money and Monetary Problems, pp. 23-71, 85-106, 
126-147; Scott, Money atid Banking, ch. 4. 

5. The Production of the Precious iVIetals and their Relative 

Value. 

a. The forms in which the precious metals are found in 
the earth and the methods of extracting them have had and 
still have important effects on their monetary value. Gold is 
one of the most widely distributed metals. It is found in 
placers ; in beds of existing or former rivers ; in quartz and 
other rocks ; in clay and even in sea-water. This wide dis- 
tribution of gold has important bearing on its steadiness of 
value. 

b. Gold is separated from sand or gravel by washing, 
either by the process of -'panning" or by "sluicing." Hy- 
draulic mining is an extension of sluicing. ''Dredging" 
may also be considered another extension of this method. 



Money. 1 1 

Quicksilver is used in the final collection of the gold in con- 
nection with these processes. Some gold ores are crushed 
and treated with quicksilver ; others are treated by a chlorina- 
tion process ; but more recently they have been treated most 
economically by the cyanide process. Some ores are best 
treated by smelting. The modern application of capital and 
science to extraction of gold has had important results on its 
supply and its value. 

c. Silver is found free or in chemical combination or in 
combination with other metals. It is secured by amalgama- 
tion, by smelting, or by elaborate technical methods. The 
application of capital and modern scientific methods have 
decreased its cost of production. 

d. In the ancient world great stores of the precious metals 
were accumulated for non-economic reasons. These hoards 
were widely scattered by the Alexandrine and Roman con- 
quests with beneficial effects on commerce. During the later 
Empire production, which was now carried on for economic 
reasons, was checked by war, scarcity of slaves, bad mining, 
the lease system and the barbarian invasions. The low prices 
resulting from the scarcity of the precious metals were among 
the economic causes of the Fall of the Empire. Production 
continued insignificant through the Middle Ages, although 
slightly stimulated by the Crusades. 

e. After the Discovery of America the existing treasures 
of Mexico and Peru were added to the money of Europe with 
slight effect ; but the discovery of the silver mines of Potosi 
and the invention of the amalgamation process of extracting 
silver (both in 1545) caused a great increase in the money 
supply of the Old World. Gradually these new supplies 
spread by trade routes causing a great increase in prices, 
stimulating commerce, affecting political and social conditions 
and arousing economic thought. 



12 Money. 

/. Among the Romans an ounce of gold was worth about 
ten or eleven of silver. Successive influences changed the 
relative production and demand of the precious metals, thus 
affecting the ratio between them until in 1680 an ounce of 
gold was worth 15 of silver. For two centuries this remained 
a normal, the ratio almost never going above i to 16 or below 
I to 14. The production of silver compared with that of gold 
from the middle of the i6th century was much greater than 
this proportion. Silver did not decline in value, however, 
because it was the money used in domestic trade and because 
the field for its employment was much enlarged by the growth 
of Oriental trade. From 1820 to 1850 the value of the ounce 
of gold ranged between 15.62 oz. and 15.95 o^- of silver. 

g. The gold discoveries of 1849 in California and Austra- 
lia were followed by an enormous increase in the production 
of gold, both absolutely and relatively to silver. During the 
preceding half-century there had been produced annually 
from thirty to fifty times as much silver as gold (by weight); 
from 1850 to 1870 there was produced only five or six time.s 
as much silver as gold. This revolutionary change in relative 
production caused only a slight change in the ratio of value 
which ranged during most of the time around 15.38. 

h. Between 1870 and 1890 the annual production of gold 
was less than in the preceding period, while the production 
of silver increased largely, so that relatively the production 
of silver was decidedly increased, being roughly from eleven 
to twenty times as large as that of gold. The ratio of gold to 
silver changed steadily and rapidly, reaching i to 22 in 1889. 

i. Since 1890 the production of both metals has been very 
large, that of gold increasing every year except for the inter- 
ruption due to the Boer war. Gold production is now about 
three times as large annually as that of the years following 
1849. Being due largely to cheapened methods it bids fair 



Money. 13 

to continue. In spite of this the ratio of value of gold to 
silver has become i to 35 or even 38. 

White, Money and Banking, pp. 41-59; Johnson, Money and 
Currency, pp. 208-216; ^eM^va.a.-a, Ptinciples, pp. 460-463; Walker, 
Money, chs. 5-8; International Bimetallism, chs. 1-2; Interna- 
tional Encyclopcedia and other Encyclopaedias under Gold and 
Silver. 

6. Government Paper l^oney. 

a. Coin certificates, or representative money, certify that 
metalic money is on deposit with the government and is pay- 
able to the holder of the certificate. United States gold and 
silver certificates are examples. Such money is convenient, 
but adds nothing to the volume of money and has no effect 
on prices. 

b. Redeemable paper money is a government promise to 
pay a certain amount of metallic money on demand, is in 
such form as to circulate as currency, is usually legal tender 
and is actually redeemed in metal on presentation. United 
States "greenbacks" since 1879 have been of this descrip- 
tion. Such money is convenient ; it is cheaper than gold or 
silver since it sets a certain amount of metal free for other 
uses ; it is safe provided it is so limited in amount as not to 
drive all metal from the country and if prompt redemption is 
maintained. If introduced into the circulation gradually it 
it would have the same effect as an equal amount of metal. 
Since these conditions depend upon the faith of the issuing 
government and since it is usually issued in times of great finan- 
cial need, redeemable paper usually becomes irredeemable. 

c. Irredeemable paper is a mere promise to pay, or even 
a mere assertion of value, forced into circulation by being 
made legal tender. Were such money strictly limited in 
amount, or so regulated in amount as to preserve a uniform 
level of prices, it would be a cheap and effective means of 
exchange within a country. In actual experience over- issue 
has almost invariably resulted, either because the urgent finan - 



14 Money. 

cial needs of the government led legislators to increase issues ; 
or because debtors have successfully agitated for cheap money 
with which to pay their debts. Our colonial paper monies, 
the Continental Currency, the United States Civil War issues, 
the Confederate Currency, the French Revolutionary assignats 
and many other examples show that paper money, nominally 
limited and redeemable, is over-issued and becomes irre- 
deemable. It causes inflation, depreciation, over-speculation. 
It is unjust to creditors, to those on fixed incomes, to working- 
men ; and works general injury. 

Hadley, Ecoftomics, §§'214, 251, 255; Bullock, httrodudioji, 
pp. 257-263; Fetter, Principles^ pp. 447-452; Walker, Political 
Economy, pp. 152-165; Money, Part II.; Scott, Money and Bank- 
ing, ch. 6; Johuson, Money atid Currency, pp. 318 331; Nichol- 
son, Principles, Bk. Ill , ch. 15; Gide, Principles, pp. 258-273; 
Mill, Priticiplcs, Bk. III., ch. 13. 



CHAPTER X. 
CREDIT AND BANKING. 

A. THE NATURE OF CREDIT AND ITS FORMS. 

a. " Credit may be defined as the power to secure com- 
modities or services at the present time in return for some 
equivalent promised at a fiature time." (Bullock.) 

b. Credit is based upon confidence in the honesty of the 
debtor and in his ability to secure the value promised. 

c. Credit is a means of transferring capital ; lies at the 
basis of all modern business ; and is an important factor in 
wealth production, since by means of it capital passes from 
the less to the more profitable uses. 

d. Book accounts, that is, the mere charging of goods on 
account books, are an important form of credit. 

e. A promissory note is a written promise to pay a specified 
sum on demand or at a given time. By endorsement it may 
be transferred from person to person and serve as a medium of 
payment. 

/. A check is an order to a bank to pay to a person named 
a certain sum of money. It presupposes a claim upon the 
bank and by endorsement may pass from hand to hand as a 
medium of payment. 

o. A draft, or bill of exchange, is an order drawn by one 
person upon another requesting the payment of a sum of 
money. It is commonly based upon a debit owing to the one 
making the draft. It also may pass from hand to hand by 
endorsement. 



i6 Credit and Banking. 

h. Bank notes or government notes are promises of a bank 
or of a government respectively to pay a stated sum, usually 
on demand. Being in the form of money they pass from 
hand to hand without endorsement. 

Bullock. Introductio7i, §§ 160-165; Johnson, Money and Cur- 
rettcy, pp 34-37; 46-50; Seligman. Principles, § 194; Seager, In- 
troductiofi, % 180, 181 ; Andrews, Institutes. § 88 ; Hadley, Econo- 
mics, §§ 256-259; Scott. Money and Banking, pp. 12, 13, 136-147; 
Mill, 'Principles, Bk. III., ch. 11. 

B. BANKS AND BANKING. 

I. Banking Functions. 

a. A bank is "a manufactory of credit and a machine of 
exchange." J. F. Johnson says : " The reader must rid his 
mind of the common notion that a bank deals in money. 
Just as a hardware store handles hardware, a dry-goods store 
dry goods, or a grocery store groceries, so a bank handles 
credit. Money is not the thing it deals in any more than 
money is the thing in which a hardware store deals." 

b. A person having wealth in process of manufacture or 
sale may have no acceptable means of payment for an exten- 
sion or continuance of his business, even though he have much 
wealth. His credit, based on this wealth, may be taken by a 
bank in return for its own credit which will have more general 
acceptability as a means of payment than would his. His 
wealth, unavailable as a means of payment, becomes the basis 
of an available means of payment. 

c. A bank by loaning or guaranteeing credit thus creates 
a most important, if not the most important, medium of pay- 
ment in modern business. Although personal credit may and 
does serve as a medium of payment, the specialization of the 
work of examining and attesting it in banks greatly facilitates 
and extends its use. A good banking system aids enormously 
in the production of wealth. 



Credit and Banking. 17 

d. The more concrete functions of a bank by which it 
performs its general function of making credit are 

(i) Discount. In exchange for a promissory note (or 
other form of credit) involving a promise to pay a specified 
sum at a specified date, and properly secured, the bank gives 
the right to receive at once the amount promised in the note 
less the interest for the time the note will run. A right to 
receive value in the future is sold for a right to receive less 
value at present. 

(2) Deposit. While the proceeds of the note may be 
drawn in money at once, they are commonly entered in the 
books of the bank as a deposit to the credit of the borrower. 
As such they may be drawn in money from time to time or 
transferred by check. This right to draw at will may also 
result from the actual deposit of money or credit instruments 
that are claims on others. The deposit is thus a liability of 
the bank which serves as a medium of payment. 

(3) Issue. The bank note, or general promise of a bank 
to pay money, is essentially the same as a deposit, being a 
liability of the bank which serves as a medium of payment. 
It is different in form and often in security. Whether the 
depositor will use the deposit or bank-note as a medium of 
payment depends upon his business and convenience. 

e. Loans and deposits tend to fluctuate simultaneously, 
not mainly, as commonly thought, because money deposited 
is loaned out, but because loans result in deposits. 

f. Banks facilitate business in other ways, collecting notes 
and bills of exchange, serving as financial agents, buying and 
selling foreign exchange, etc. 

Dunbar, Theory and History of Banking, ch. 2; Scott, Money 
and Banking, pp. 120-134; Johnson, Money and Ctirrency, pp. 
44-46; Bullock, Introduction,^ pp. 273-278; Seliginan, Principles, 
pp. 472-474; Seager, Introduction, % 185; Gide, Principles, pp. 
367 378; Fetter, Principles, -p^p. 462-465; White, Money and Bank- 
ing, pp. 217 220. 



1 8 Credit and Banking. 

2. Kinds of Banks. 

a. Banks of deposit and discount are those whose functions 
are those just described. Issue is not an essential function. 
In the United States such banks may be chartered by the 
national or state government, may be private, or may be trust 
companies having, as such, other financial functions. Only 
banks chartered by the national government now issue notes 
in this country. 

b. Savings banks exist to receive and invest comparatively 
small sums. In some states they are philanthropic in nature. 
Under the best regulated state systems they do not do a 
general banking business, but invest only in certain approved 
kinds of securities. 

3. Banking Operations and Accounts. 

a. The joint stock company is the general form of organi- 
zation. The stockholders of an incorporated bank elect a 
board of directors in whose hands rests the entire management 
of the bank during their term of office. They elect president, 
vice-presidents, cashier, all other ofiicers, decide upon invest- 
ments and control general policy. That in some cases they 
are largely influenced by the president or cashier does not 
affect the fact of the legal and moral responsibility of the 
directors. 

b. The capital is the amount of money subscribed by the 
shareholders when the bank is organized. In the United 
States it is usually divided into shares of ^loo. Difi'erent 
rules prevail under different bank systems as to the propor- 
tion of the capital that must be paid in before business is 
begun. The surplus paid in by shareholders or accumulated 
from profits is practically an addition to capital. The func- 
tion of capital and surplus is to serve as a guarantee of ultimate 
solvency. Should losses be met, they fall on surplus and 
capital. 



Credit and Banking. 19 

c. Since the bank must meet all claims promptly, its in- 
vestments must be such as can be turned into cash quickly. 
Short term business paper and bills of exchange are the most 
common investments. Properly secured by endorsement or 
collateral they are safe ; the rate of interest upon them is 
equal to that on other equally safe investments \ and since 
they are constantly falling due, they enable a bank to expand 
or contract loans quickly. A bank may also invest in stocks 
and bonds that have a quick market, especially if it has 
many steady accounts. Real estate, except a banking house, 
is a bad banking investment. The greater the amount of 
investments the greater the income. A bank, then, desires to 
invest all its funds ; but since it must meet in legal tender 
money on demand all claims of depositors, it must so limit 
its investments as to have sufficient for this purpose. 

d. The reserve is the amount of legal tender money kept 
on hand by a bank in order to meet promptly all demands. 
Its function is not so much to secure ultimate as immediate 
payment of obligations. The amount of reserve that should 
be kept depends upon the nature of a bank's business and the 
general financial condition of the country. The proportion 
is sometimes prescribed by law. Reserve is estimated as a 
percentage against deposits, or in some cases, against all 
demand liabilities. It may be increased either by increasing 
money on hand, or by decreasing liabilities. A contraction 
of loans is the most frequent actual process of accomplishing 
such increase. 

e. A bank statement issued periodically sets forth in more 
or less detail a bank's condition. On one side are given the 
liabilities which are of two general classes; those due to the 
shareholders as such; and those due to all others. The fol- 
lowing is a simple example of a statement of a bank that does 
not issue notes: 



20 



Credit and Banking. 





LIABILITIES. 


ASSETS. 




Capital, 
Surplus, 


. ^100,000 
20,000 


Loans, .... 
Stocks and bonds. 


^595,621 
130,000 


Profits, 


• • • 5>649 


Real estate, . 


30,000 


Deposits, 


. • • 754,237 


Other assets, . 


2,659 




^879,886 


Expenses, . 
Reserve, . . 


1,506 
120,100 



^879, 886 

Dunbar, Theory and History of Baulking, ch. 3; Seager, Intro- 
duction, §§ 184, 185; White, Money and Banking, pp. 229-239. 

4. The Check System. 

a. When a bank credit takes the form of a deposit it be- 
comes a circulating medium through the check system. If A 
who draws the check and B who receives it have accounts in 
the same bank, the amount of the check is charged against A's 
account and credited to B's. A's original debt to B is paid 
by a transfer of a claim upon a bank without the use of money. 

b If A and B have accounts in different banks, the check 
drawn by A upon the Farmers Bank is credited to B in the 
Merchants Bank when there deposited by him. The check 
is now a claim of the Merchants Bank upon the Farmers 
Bank. When paid directly or indirectly by this, it is charged 
against A's account. A's debt has been paid by book entries 
involving transfers of claims. 

c. The clearing house is an institution for facilitating ex- 
change and settlement of checks. One is found in every city 
of financial importance. To the clearing house each bank 
sends every business morning all the checks upon other banks 
in the city received by it the previous day so arranged as to 
be distributed quickly to banks against which they are drawn. 
From the other banks each bank receives all the checks drawn 
against it and deposited in them the previous day. The 
checks brought in by a bank represent its total credit or 
claim ; those received by it at the clearing house represent 



Credit and Banking. 21 

its debit or obligation. Tlae difference represents its debit 
balance which must be paid in money during the day; or its 
credit balance which it is entitled to receive. The sum of 
claims against the clearing house equals the sum of its obliga- 
tions; and the sum of credit balances must equal the sum of 
debit balances. The clearing house not only saves much time, 
expense and danger, but it greatly decreases the amount of 
actual money necessary to settle balances. In smaller cities 
clearing house balances are sometimes settled by drafts upon 
New York. 

d. Checks drawn upon banks in smaller cities and de- 
posited in banks in other cities ("country checks ") are paid 
by a more or less round about system of transfer from bank 
to bank. They are frequently finally settled either by off- 
setting obligations or by drafts on a financial center. 

e. It is clear that by the mechanism of the check system 
deposits based upon loans, or in brief credit, are a most im- 
portant medium of exchange, increasing and decreasing auto- 
matically with changes in business, but always dependant upon 
the existence of sufficient legal tender reserve to insure its 
prompt liquidation. 

f. At certain times of acute financial crisis when banks, 
which were in reality sound, were not possessed of sufficient 
reserve to pay obligations promptly, clearing houses have 
issued certificates, in return for securities deposited. Such 
certificates were used by the banks in settling clearing house 
obligations, setting free much cash reserve for the urgent 
needs of the community. Even the mere announcement that 
the clearing house would issue such certificates has been suffi- 
cient at times to allay panics, 

Dunbar, Theory and History of Banking, ch. 4; Johnson, 
Money and Currency, pp. 46-51; Seager, Introduction, § 183; 
White. Money and Banking, pp. 240-255; Hadley, Economics, 
pp. 232-238: Scott, Money and Banliing, pp. 218-226; Cannon, 
Clearing Houses. 



22 Credit and Banking. 

5. Bank Currency. 

a. The bank note is a promise to pay and, as has been 
shown, is essentially like the deposit since it is credit used as 
a means of payment. Being in convenient denominations 
and often resembling government paper money, it circulates 
freely as money among all, including those unable to judge 
of its safety and those practically unable to refuse to accept it. 
Even the best systems of redemption do not insure that con- 
stant test of worth which is found in the case of the check. 
For these reasons, based upon long experience, some protec- 
tion of note holders as distinguished from other creditors of 
a bank has been generally deemed advisable. The more im- 
portant methods are the following : 

b. It is frequently made a prior lien upon the assets of the 
bank. This method may be combined with others. 

c. It is sometimes protected by the deposit (by the issuing 
bank) with some government authority of collateral security 
such as government bonds. From the sale of such securities 
in case of the inability of the bank to meet its obligations the 
note holders are reimbursed. If the securities accepted are 
carefully prescribed and if overissue is prevented by require- 
ment that the notes be printed or stamped by the government, 
absolute safety is secured by this method, but elasticity, or 
quick response of the amount of notes to the fluctuating needs 
of business, is absent. 

d. The Bank of England notes up to a certain amount are 
protected by government obligations to the Bank. Above 
that they are protected by an equivalent amount of gold 
becoming thus coin certificates. Absolutely safe they in no 
way add elasticity to the currency. 

e. In some banking systems, notably the Canadian, bank 
notes have been protected by a safety fund collected from all 
the banks by a percentage tax and used to pay the notes of 



Credit and Banking. 23 

any insolvent bank. The fund in such cases is reimbursed 
entirely or in part from the assets of the bank according as 
the notes are or are not a prior lien. In the Canadian system 
such notes are limited to the amount of a bank's capital, are 
not legal tender, are promptly redeemed at redemption centers 
through the country and bear interest from the time of a 
bank's failure to redeem until they are paid. These pro- 
visions in connection with its branch bank features make the 
Canadian bank-note currency absolutely safe, elastic and very 
sensitive to the needs of different parts of the Dominion. 

/. The German banks are like the Bank of England in 
that they are allowed a certain amount of uncovered circula - 
tion, namely, 385,000,000 m. and that above this amount all 
notes must be protected by an equivalent amount of cash 
except as stated below. Unlike the Bank of England the 
German banks may issue uncovered notes by paying a tax at 
the rate of 5^ per annum upon the notes thus issued. Further 
the cash held must equal one-third of the circulation and the 
other two-thirds must be protected by short term business 
paper. This system secures a specie basis, but allows an 
expansion in time of monetary stringency. 

g. Easy redemption will do much to prevent excessive 
issues and ensure safety. It is absolutely necessary unless notes 
are protected by specie or bonds, and desirable even then. 

Dunbar, Theory and History of Banking-, ch. 5; chs. 8, 10, 11 
contain explanations of the French, English and German bank 
note currency; Scott, Money and Banking, ■p'p. 166-176; ch. 10 
describes foreign bank systems; Fetter, Principles, pp. 465-468; 
Seligman, Principles, § 197; Johnson, Money and Currency, pp. 
331-339; Hadley, Economics, %% 2T$-2'S)q; Nicholson, Principles, 
Bk. III., ch. 19; White, Money and Banking, ch. 15 contains 
accounts of the foreign bank note systems ; Bagehot, Lombard 
Street. 

6. General Regulation of Banks. 

a. Experience shows that public regulation is essential to 
soundness. Such public control usually insists upon publicity 



24 Credit and Banking. 

in the form of frequent statements. It sometimes provides for 
governmental inspection. 

b. Specific regulations are sometimes made as to allowable 
investments ; amounts that may be loaned to one person ; the 
proportion of reserve ; the paying up of capital, etc. 

Scott, Money and Banking, ch. 9. 

C. DANGERS OF CREDIT. 

a. Unwise extension of credit promotes unwise expenditure 
and extravagance. It sometimes encourages unwise govern- 
mental or corporate expenditures. 

b. Unwisely extended in business it promotes speculation 
and raises prices as does any increase of the medium of 
exchange. Such rising prices encourage further speculation 
and unwise investments. These tendencies may continue in 
ever widening circles until a vast volume of business is being 
done upon an artificial basis. Sooner or later confidence, 
which is the basis of credit, is shaken, prices fall rapidly, 
speculative undertakings and even sound ones fail, panic 
results and is often followed by a long period of depression 
before confidence can be restored and credit established. 

Hadley, Economics, §§274-280, 333; Walker, Political Economy , 
pp. 174-186; Selignian, Principles, ^ 198; Marshall, Economics of 
Industry, Edition of 1891, pp. 151-153; Jones, Economic Crises. 



CHAPTER XI. 
AMERICAN MONETARY HISTORY. 

I. Colonial and Revolutionary Bills of Credit. 

a. Bills of credit, receivable for taxes and frequently legal 
tender, were issued by the American colonies to provide for 
war expenses, or ordinary expenses, or to make loans to pri- 
vate individuals. In spite of various provisions designed to 
secure redemption and to prevent depreciation, they were 
almost invariable issued in excess, leading to depreciation, 
speculation, loss to creditors and injury to business. 

b. Despite this experience and the warnings of prominent 
men, the Continental Congress issued large amounts of Con- 
tinental Currency to meet war expenditures. This money 
rapidly depreciated and ultimately became worthless in spite 
of laws fixing prices and forbidding discrimination against it. 
The results were the usual results of paper issues. 

White, MoJtey and Banking, Bk. II., chs. 2, 3; Bullock, Mone- 
tary History of the United States, pp. 29-78; Dewey, Financial 
History of the United States, §§ 9-11, 15-17; Hepburn, Contest for 
Sound Money, pp. 53 60. 

2. Establishment of Our National Monetary System. 

a. The Federal Constitution provides that Congress shall 
have power "to coin money, regulate the value thereof, and 
of foreign coin ;" and that "no State shall coin money; 
emit bills of credit ; make anything but gold or silver coin a 
tender in payment of debts." 

b. At the beginning of the national government many 
kinds of English, Spanish and French gold and silver coins 
were in circulation. In different parts of the country these 



26 American Monetary History. 

were differently valued in the various monies of account. 
Hamilton, as Secretary of the Treasury, made a report to 
CcThgress in 1791 on the coinage. Although preferring a 
gold unit he recommended bimetallism in order not to reduce 
the money in circulation. He advised the adoption of the 
ratio of 15:1, that being the market ratio at the time. He 
recommended that the weight of silver (371^ grs.) in the 
Spanish dollar, then widely used, be made the unit and, con- 
sequently, that the gold dollar contain 243^ grs. 

c. The act of 1792 establishing our national standard fol- 
lowed Hamilton's recommendations. It provided for free 
coinage of gold and silver at the ratio of 15:1. The silver 
unit was a dollar of Zl'^}i g^^- pure silver and the gold unit 
was an eagle of 247.5 g^^- pure gold. 

d. The value of silver declined after 1792. Consequently 
the mint ratio undervalued gold which disappeared when 
coined and soon was no longer brought to the mint. Although 
the situation was much obscured by the circulation of foreign 
gold, the use of bank notes and the exportation of new United 
States coins, the standard was in reality a silver monometallic 
one. Bimetallism failed. 

Dewey, Financial History of the United States, %% 27, 29, 30, 44 ; 
White, Money and Bafiking, pp. 31-34; Johnson, Money and Cur- 
rency, pp. 341 343; Scott, I\/o7iey and Bankiuff, pp. 329 332; 
Lauglilin. History of Bimetallism in the United States, cli. 2; 
Walker, International Bimetallistn, pp. 110-116; Hepburn, Con- 
test for Sound 3Ioney, chs. I, 2. 

3. The Change to Gold Monometallism. 

a. A growing demand for a change that would lead to 
a restoration of gold to our circulation resulted in the law of 
1834. The restoration was brought about by changing the 
ratio to 16:1. This was accomplished by reducing the weight 
of gold in the dollar to 23.2 grs. In 1837 a law revising the 
coinage laws raised the weight of gold in the dollar to 23.22 



American Monetary History. 27 

grs., making the ratio iS-gS-f-:!- The weight and ratio of 
gold and silver hare not since been changed in standard coins. 

b. This act overvalued gold, the market ratio at the time 
being 15.73: i. Silver disappeared from circulation, even the 
subsidiary coins being withdrawn. This tendency was acceler- 
ated by the gold discoveries in California. 

c. The lack of minor coins caused such inconvenience 
that in 1853 a law was passed making silver coins of denomi- 
nations less than one dollar token coins with legal tender 
quality limited to five dollars. The weight of pure silver in 
one dollar's worth of these coins, face value, was fixed at 
345-6 grs. 

d. The result of these laws was, while nominally retain- 
ing bimetallism, to establish practically the gold standard 
with an excellent subsidiary coinage system. No further 
change in the laws governing the metallic currency was made 
until 1S73. 

Dewey, Financial History of the United States, § 90; White, 
Money and Banki7ig, pp. 34-36; Johnson, Money and Currency, 
pp. 344 346; Laughlin, History of Bimetallism, chs. 4, 5; Hep- 
burn, Contest for Sound Money, ch. 3. 

4. The Paper Currency of the Civi! War Period. 

a. The enormous and sudden increase of government 
expenditures due to the war necessitated the use of every 
possible source of revenue. The expenditures for the four 
fiscal years 1858-1861 were $272,826,000 ; for the four fiscal 
years 1862-1865 they were $3,348,400,000. At first bor- 
rowing by bonds was resorted to, and then gradually increased 
customs and internal revenue taxes to the limit of endurance. 
The increased taxes became effective only slowly. 

b. To meet pressing needs of the early years of the war 
Congress authorized the issue of legal tender government 
notes receivable by and payable to the government except for 



28 



American Monetary History. 



duties on imports and interest on the public debt. The act 
of Feb. 25, 1862, provided for $150,000,000 ; that of July 
II, 1862, for ;gi5o,ooo,ooo and that of March 3, 1863, for 
^150,000,000. Of the $450,000,000 authorized, $431,000,- 
000 were outstanding June 30, 1864. This action was bitterly 
opposed by many at the time and there is much reason to 
believe that more vigorous and far sighted use of the taxing 
power at the beginning of the war, supplemented by the issue 
of bonds, would have furnished sufficient funds without re- 
sorting to paper money. 

c. Measured in gold these notes showed immediate depre- 
ciation. They declined steadily to 62 in February, 1863 ; 
then rose gradually to 79 in August, 1863 ; then fell steadily 
and rapidly until they reached 39 in July, 1864; from that 
time until the end of the war they rose gradually, standing at 
74 in May, 1865. Somewhat more slowly, prices of com- 
modities revealed this depreciation, while wages rose very 
tardily. This meant a heavy burden upon the people already 
suffering from heavy taxes. The rise in general prices cannot 
be ascribed entirely to inflation, being due to various causes 
including the heavy taxes on domestic and foreign produc- 
tions. According to the Aldrich Report the course of prices 
and wages was as follows : 

YEAR. 

i860, 
1861, 
1862, 
1863, 
1864, 
1865, 

d. The financial difficulties caused by the war and the 
drain upon bank and government reserves caused the suspen- 
sion of specie payments, Dec. 30, 1861. With the issue of 



PRICES. 


MONEY WAGES 


100. 


100. 


100.6 


100.8 


117. 8 


102.9 


148.6 


IIO.5 


190.5 


125.6 


216.8 


I43I 



American Monetary History. 29 

the "greenbacks" the depreciation of paper increased so 
that by the summer of 1862 even the silver subsidiary coins 
of lower standard were driven from the circulation in accord- 
ance with Gresham's law. From this time until several years 
after the war, only paper was used in ordinary transactions. 

e. The deficiency of small change caused great incon- 
venience. Fractional currency and copper coins were issued 
by cities and individuals. Postage stamps were largely used 
in small trade. In July, 1862, Congress authorized the issue 
of postage currency in-small denominations. In March, 1863, 
Congress authorized the issue of paper fractional currency 
receivable in payments to the government and exchangeable 
for legal tenders. These remained the small currency of the 
country until some years after the war. . 

/. Although not in circulation gold was needed by the 
government to pay interest on the debt ; by importers to pay 
duties ; and for trade with other countries. This gold was 
bought with paper and constantly fluctuated in its price 
according to actual or expected changes in business, financial, 
political or military conditions. An exchange for dealing in 
gold was opened in New York and gold became a favorite 
subject of speculation. Because of the alleged evils of this 
speculation. Congress passed a bill in 1864 forbidding deal- 
ing in gold for future delivery. Since this law prevented 
legitimate purchase of gold, it caused a sharp rise in the paper 
price of gold. The law was repealed fifteen days after its 
passage. 

g. The question of the constitutionality of the legal 
tenders was early- raised and the early decisions of the Su- 
preme Court were unfavorable, although the cases brought 
involved limited questions such as the use of the notes to 
settle contracts entered into before the legal tender act was 
passed. In one of these cases, however, (1869) the Court by 



30 American Monetary History. 

four to three implied that the legal tender clause was both 
improper and unnecessary. In 1871 the membership of the 
Court having changed, it was decided that the legal tender 
notes were constitutional as a war measure. In 1884 a de- 
cision was rendered that they were legitimate even when 
issued in time of peace. This decision, which itself reveals 
the influence of the Civil War in enlarging federal authority, 
was bitterly attacked by some historians and constitutional 
lawyers. All in all, popular opinion agreed with the Court 
and there is no further question of the power of the Federal 
Government to issue legal tender notes. 

h. During the same period the Confederate States were 
experiencing to the utmost the evils of paper currency. Im- 
mense quantities were issued by the Confederate government, 
by the individual states, by individuals and corporations 
under authority received from the States. They all became 
practically worthless soon. 

Dewey, Fina7icial History of the United States, §§ 116- 125, 131, 
155, 156 ; White, Mo7iey and Banki^tg, Bk. II., ch. 3, Johnson, 
Money and CurreJicy, pp. 272-290, Hepburn, Contest for Sound 
Money, chs. 8, 11. 

5. Monetary Reconstruction. 

a. Various views as to the best policy toward United 
States notes prevailed after the war, from the extreme attitude 
in favor of immediate resumption of specie payments to that 
which favored an increased use of government notes. At 
first (1866) Congress adopted a policy of gradual contraction, 
but growing opposition to a reduction of the circulating 
medium brought about a repeal of the contraction act in 1868 
after ^44,000,000 had been withdrawn. 

b. The panic of 1873 revived the demand for more paper 
money. The Secretary of the Treasury re- issued $26,000,- 
000, making the total outstanding $382,000,000. Congress 
in 1874 passed a bill for the permanent increase of the cur- 



American Monetary History. 31 

rencyto $400,000,000. This bill authorizing an increase of 
paper in time of peace was vetoed by President Grant, who 
thus checked the inflationist movement, although the Green- 
back party was active and in some sections powerful from 
1876 to 1880. 

c. In January, 1875, the Resumption Act was passed pro- 
viding for reduction of the greenbacks to $300,000,000; 
for the substitution of silver coin for the fractional currency ; 
and for the resumption of specie payments on January ist, 
1879. To secure gold for this purpose the Treasury could 
sell bonds. 

d. The Treasury gradually accumulated gold from the 
surplus revenue and from the sale of bonds — a favorable con- 
dition of trade aiding this process. A fortnight before the 
date set the premium on gold disappeared and on January ist, 
1879, specie payments were resumed with no difficulty. In 
May, 1878, Congress prohibited the further permanent re- 
tirement of greenbacks, and the amount then outstanding 
($346,681,000) still remains. These notes are redeemable 
in gold, but are re-issued when so redeemed. 

Dewey, Financial History of the United States, §§ 143-147. i54- 
161; White, Money and Banking, pp. 174-181; Hepburn, Contest 
for So^md Money , chs. 9, 10; Noyes, Thirty Years of American 
Finance, chs. 1-3. 

6. Silver Legislation. 1873-1893. 

a. In 1873 the United States was legally a bimetallic 
country, but silver was so undervalued that it was not coined, 
so that gold was the standard. In fact paper money, some- 
what depreciated, was the money of circulation and prices 
were reckoned in it In 1873 a law for the revision of the 
coinage was enacted. This law incidentally dropped from 
the list of coins the long disused silver dollar. Although the 
bill had been before Congress for two or three years, this 
provision attracted no attention, for no one wanted a more 



32 American Monetary History. 

expensive dollar. The law was later described as "the 
crime of 1873." 

b. However, the decline in the price of silver beginning 
at this time made this change one of great significance. The 
advocates of enlarged circulation, defeated in their attempts 
to secure paper inflation, saw that, but for the law of 1873, 
their desire for cheaper money would have been realized 
in part by the enlarged use of silver. They now vigor- 
ously demanded the restoration of silver to free coinage. 
The continued decline in silver and the rise of paper money 
toward equality with gold strengthened their cause among 
all who demanded cheaper money. A bill for the free coin- 
age of silver was passed by the House in November, 1877. 
It was amended by the Senate so as to limit the amount 
coined and secure the profit to the government. In this form 
it became law over the presidential veto in 1878. 

c. The provisions of this law of i8j8 (sometime called 
the Bland, or the Bland-Allison, act) were that the govern- 
ment should buy each month not less than two nor more than 
four million dollars worth of silver bullion at the market 
price and coin it into dollars containing 371.25 grs. of pure 
silver ; that these dollars should be legal tender ; and that 
certificates of deposit in denominations of not less than ten 
dollars might be issued upon the deposit of such coin with 
the government, such certificates being receivable for public 
dues, but not legal tender. 

d. The predicted quick transition of the United States to 
a cheap silver standard did not take place because the amount 
of silver issued was so limited. On the other hand the rapid 
development of the country in population, wealth and com- 
merce, required more money. The silver issued met this 
need, which would otherwise have been satisfied by a natural 
inflow of gold. The decline of the bank circulation also 
made a place for silver. During the depression of 1884-1886 



American Monetary History. 33 

the surplus revenues of the government made it possible to 
hoard the silver issues which were temporarily in excess. A 
comparatively small amount of silver dollars circulated, but 
the silver certificates were kept out, especially after the pass- 
age of an act in 1886 providing that they might be issued in 
small denominations. 

e. The agitation for free coinage continued, having some 
support from the decline in the price of silver and the decline 
in general prices. Since a presidential veto would prevent 
the passage of a free coinage law, the Sherman law was passed 
in 1890 as the price paid by the Republican party for the 
votes of a few silver Senators necessary to the passage of the 
McKinley high tariff bill. In view of the sharp political 
issue joined slightly later, it is significant that this bill was 
passed by a Republican Congress and President, 

/. This Sherman Laitj of i8go provided that the govern- 
ment should issue legal tender notes to be used in buying 
4,500,000 ozs. of silver monthly at the market price. With a 
temporary exception only so much silver was to be coined as 
was needed for the redemption of these Sherman notes. 
Further, they might be redeemed in gold or silver at the dis- 
cretion of the Treasury, it being declared the policy of the 
United States to keep the two on an equality. The purchase 
provisions of the law of 1878 were repealed, but silver certifi- 
cates were still to be issued. 

g. The amount of currency forced into circulation by the 
law of 1890 was greater than that which resulted from the law 
of 1878, although the need of more money was no greater. 
Further, the kind of money issued, the treasury notes, made a 
greater demand on the gold reserve. Unfavorable trade con- 
ditions led to gold exports. The treasury funds were de- 
pleted by large expenditures while the McKinley act had 
decreased customs revenues. The combined result was a por- 
tentous drain of the gold reserve, upon which the maintenance 



34 American Monetary History, 

of the gold standard depended. The Cleveland administra- 
tion, March, 1893, inherited from its predecessor a panic 
which became acute in July. Through the strenuous efforts 
of President Cleveland a special session of Congress (August 
to November) repealed the purchase provisions of the act of 
1890. 

Dewey, Financial History of the United States, %% 170-173, 186- 
189; Taussig, Silver Situation in the United States, Part I.; 
White, Money and Banking, pp. 191-205; Johnsou, Money and 
Currency, pp. 2)4^-3^o; Laughlin, History of Binietallisvi in the 
United States, chs. 7, 13; Hepburn, Contest for Sound Money, 
chs. 12, 13, 17; Noyes, Thirty }'ears of American Finance, 
chs. 4-8. 

7. The Great Silver Controversy. 

I. GENERAl^ CONSIDERATIONS. 

a. The panic of 1893-4 was a serious one. Government 
revenues decreased, hundreds of banks failed, deposits de- 
creased, bank clearings were low, railroads went into the 
hands of receivers, failures were numerous, production of all 
kinds and notably of coal and iron decreased, distress and 
unemployment prevailed. 

^. Prices, as shown by index numbers, declined steadily, 
being lower in 1896 than at any other time since the Civil 
War. The condition of the agricultural population especially 
in the West was unfortunate. Prices of all sorts of agricul- 
tural products were very low. The principal and interest of 
the mortgages with which the farms had been bought became 
an increasing burden. 

e. The Harrison administration had left to the Cleveland 
administration a treasury in which the gold reserve was 
lower than it had been since the resumption of specie pay- 
ments, a low cash balance of any sort, heavy expenditures and 
a decreased revenue. The Wilson-Gorman tariff still further 
decreased revenues. The amount of government paper re- 
deemable in gold was larger than ever and available means of 



American Monetary History. 35 

redemption small. Legitimate need for gold and particularly 
a fear of suspension of gold redemption led to a great increase 
in notes presented for redemption. In January and Novem- 
ber, 1S94, and in February and December, 1895, the Treas- 
ury sold bonds to secure gold to maintain specie payments, 
the total addition to the debt in this time of peace being over 
^262,000,000. These sales, especially one called the " syndi- 
cate ' ' agreement, caused fierce criticism of the administration 
by the silver advocates who claimed that silver should be used 
for redemption and that a corrupt conspiracy of bankers and 
administration had adopted an illegal procedure. 

d. The prevailing discontent based on economic condi- 
tions revealed itself politically. In the South and West the 
Populists gained great strength as did a radical wing within 
the Democratic party. President Cleveland by his gold 
monometallic policy had lost the support of his own party in 
Congress. Within the Republican party a minority favored 
free coinage of silver while many others were willing to make 
concessions to the silver men as a matter of policy. Only in 
the East was there a positive advocacy of gold monometallism 
and throughout the rest of the country this was thought to be 
due largely to the selfishness of the creditor class. 

e. The Democratic National Convention met at Chicago 
in 1896. The free coinage faction had control from the start, 
passed a strong free coinage platform and nominated Wm. J. 
Bryan for the presidency because of his brilliant speech in 
favor of silver. The Republicans declared against free coinage 
of silver except by international agreement and thus caused a 
secession of western silver members of the party. From a 
non-committal attitude, the Republican nominee, William 
McKinley, gradually took one of strong advocacy of what was 
called " sound money." After one ot the fiercest campaigns 
in the country's history the opponents of free coinage won. 
Because of the strength of the silver men in the Senate the 



36 American Monetary History. 

administration elected could do no more than maintain the 
status quo. 

f. Although the arguments advanced in the campaign of 
1896 had reference, in part, to a particular situation they in- 
volved such a comprehensive consideration of general monetary 
principles in an actual situation that a resume of the discus- 
sion seems worth while. 

Dewey, Financial History of the United States, §§ 189-195; 
Noyes, Tliirty Years of American Finance, chs. 9, 10; Hepburn, 
Contest for Sou7id Money, pp. 373-391; Johnson, Money and Cur- 
rency, pp. 356-360; White, Money and Bantling, pp. 202-211. 

II. THE ARGUMENT FOR AND AGAINST 
FREE COINAGE IN 1896. 

a. The question of stability in the standard of value. 

(i) The bimetallists argued that their policy would secure 
greater stability in the standard of value. They claimed 
that under monometallism the standard of value is sub- 
ject to all the results of change in demand or supply of 
the [chosen metal, while under bimetallism, since the 
two metals would not be likely to change in the same 
direction simultaneously, the monetary demand would 
be transferred to the cheaper, thus preventing as great 
fluctuation as would otherwise take place. Further, the 
very size of the money base would prevent fluctuations 
in supply having the same effect as under monometal- 
lism. 

(2) The monometallist, on the other ^hand, contended 
that the fluctuations in the standard of value, although 
not so great under bimetallism, would be more frequent, 
since they would be caused by changes in the supply of 
either metal. They further contended that, while the 
argument of the bimetallist might be sound when the 
legal ratio Vas close to the market ratio, it had no 
potency in the particular situation under consideration 



American Monetary History. 37 

since not bimetallism but silver monometallism would 
be the result of the policy proposed. 

b. The question of a " par of exchange." 

(i) The bimetallist urged bimetallism as furnishing a 
" par of exchange" between gold and silver using coun- 
tries. He alleged that gold using countries had recently 
suffered because of the absence of such a par of exchange, 
the gold value of their exports constantly decreasing 
because of the fall in the value of the silver with which 
they were paid for. Further, such a par of exchange 
would encourage the flow of capital from country to 
country. 

(2) The gold monometallists denied that trade is *'so 
much hampered by fluctuations in relative money values 
as is often asserted." Further free coinage of silver by 
the United States alone would mean that this country 
would be silver monometallic and thus lack a par of 
exchange with all the important industrial and commer- 
cial nations. 

c. The argument as based on the prices of commodities. 

(i) The silver advocate dwelt particularly upon the social 
and industrial evils due to falling prices. Index num- 
bers proved the fact of falling prices. Falling prices 
are disastrous to farmers, to merchants, to laborers, to 
debtors — all of whom are the active, energetic classes. 
Falling prices throughout history have been accompanied 
by depression and disaster. The fall in prices since 1873 
was ascribed to the demonetization of silver and the con- 
sequent increased demand for gold to do so much more 
of the world's monetary work. Although there had 
been an increase in the production of silver, it was not 
so important as certain previous changes in the relative 
production of gold and silver had been. In these earlier 



38 American Monetary History. 

cases the new metal had under bimetallism been absorbed 
without great effect on the ratio, and so it would have 
been after 1873, if silver had not been demonetized. 

(2) The gold advocate ascribed falling prices to changes 
in methods of production and transportation. Further, 
prices ought to fall since the real cost of production 
measured in labor has fallen. The price of labor meas- 
ured in gold has not fallen, and this is the fairest test of 
the stability of value of money. The increase in 
prices which would follow remonetization of silver 
would work great injustice to the thrifty creditor class, 
including all who have small savings. It would decrease 
the real value of all fixed incomes. It would decrease 
the real incomes of laborers, since prices would rise 
more rapidly than would wages. 

(3) The silver advocate denied that changes in methods 
of production and transportation explained the fall in 
prices, since equally revolutionary changes in methods 
of production between 1849 and 1873 were accompanied 
by rising prices. He insisted that the value of labor 
ought to increase, since the results of progress should 
accrue to the producing classes and not to those having 
incomes from accumulated wealth. This desirable con- 
summation would result from bimetallism. 

d. The possibility of maintaining a bimetallic standard at 
16 to I. 

(i) The extreme gold monometallist contended that bi- 
metallism was always a failure, and pointed to the ex- 
perience of the United States, of France and of the 
Latin Union. He contended that a great flood of silver 
would drive all gold out of circulation and result in 
metallic inflation and depreciation. 



American Monetary History. 39 

(2) The silver advocate contended that bimetallism was 
not impossible even for the United States alone, since 
the amount of free silver was so slight that it could be 
absorbed into the circulation of the United States with- 
out displacing all the gold. Even if it did, this would 
not be so serious a result as the continuance of the exist- 
ing low prices. 

(3) The international bimetallist agreed with the advocate 
of free coinage of silver as to the evils of gold mono- 
metallism. He contended that the experience of the 
United States was of no significance as to the possibiHty 
of bimetallism by international agreement. Further, he 
claimed that for seventy years bimetallism in France was 
not only successful, but rendered the world a great ser- 
vice by preventing the serious effects on the ratio of 
value- which would otherwise have resulted from revo- 
lutionary changes in the relative ^production of the 
precious metals. Arguing vigorously for the possibility 
and necessity of international bimetallism, he agreed with 
the gold monometallist that free coinage of silver by the 
United States alone would result in silver monometallism 
at a depreciated standard with disastrous consequences. 

(4) The contention of the international bimetallist is 
that, if a number of leading nations agree to coin both 
metals freely at a common ratio, any change in the ratio 
of value will cause such an increased demand for the 
cheaper and decreased demand for the dearer that the 
market ratio cannot long vary from the legal ratio. 

Tohnson, Bloney and Currency, chs. n, 12; Hadley, Economics, 
vv 208-2^1 ; Bullock, Introduction, §§ 191199. Taussig, Silver 
Situation in the United States, Part II; Walker, International 
Bimetallism; Political Economy, PP-^ 463-4.75 ; Scott ^/.«CV ««rf 
Banking, chs. 14, 15; Nicholson, Principles, Bk. Ill, ch. ib. 
Money and Monetary Problems, pp. 246 311. 



40 American Monetary History. 

8. Establishment of the Gold Standard. 

For a time after the election of 1896 the advocates of silver 
continued their agitation and in the Senate won some slight 
victories. After 1898 the enormous increase in gold pro- 
duction weakened the argument for free coinage of silver so 
far as it was based on the insufficiency of gold. Enormous 
crops and a favorable condition of industry and commerce 
removed much of the general economic discontent which was 
the real basis of the silver movement. Rapidly rising prices 
due to these conditions undermined the free coinage argument 
so far as it depended on falling prices. In 1900 Congress 
passed a law which provided that gold is the standard of value 
and making it the duty of the Secretary of the Treasury to 
maintain all other monies at a parity with it ; that all United 
States notes shall be redeemed in gold and that a reserve fund 
of $150,000,000 shall be maintained for this purpose; that 
the Treasury notes of 1890 shall be retired and that silver 
certificates shall be mainly in small denominations. 

Dewey, Financial History of the United States, § 198: Johnson, 
Money and Currency, pp. 360-363; Hepburn, Contest for Sound 
Money, ch. 18. 



CHAPTER XII. 
AMERICAN BANKING HISTORY. 

I. The First and Second United States Banks. 

a. The first Bank of the United States was chartered by 
the federal government in 179 1. Its capital was ^10,000,000, 
of which the government furnished one-fifth. Its notes were 
not specially protected, but circulated without depreciation. 
The Bank served a useful purpose as a regulator of the existing 
state bank circulation. It acted as the government's financial 
agent. Because of the opposition of the state banks, its charter 
was not renewed when it expired in 181 1. 

b. The second Bank of the United States was chartered 
for twenty years in 1816. Its capital was ^35,000,000, of 
which the government furnished one-fifth. Its notes had no 
special protection. It acted as the government's financial 
agent. It became involved in politics and its charter was not 
renewed. Neither of these banks is of any significance from 
the standpoint of monetary principles, but they had great 
importance in connection with the political history of the 
time. They rendered good service in connection with the 
general finances of the government and the country. 

Ti&^&y, Financial History of the United States, §§ 43, 58, 67, 
68, 70, 71, 86-88; on pp. 97, 118, 143, 197 in Dewey will be found 
extensive references on this subject ; White, Money and Banking, 
pp. 278-314; Hepburn, Contest for Sound Money, pp. 62-73, 81-112. 

2. State Banking Before the Civil War. 

a. Until the establishment of the National Banking System 
during the Civil War, a large part of the actual monetary 
circulation of the country consisted of notes issued by banks 



42 American Banking History. 

chartered by the States. The laws under Avhich these banks 
were formed varied greatly. In some states there were almost 
no restrictions upon the formation and management of banks. 

b. This lack of uniformity and wise regulation, behind 
which was an unintelligent and apathetic public opinion, 
resulted in all sorts of banking abuses. Capital was fre- 
quently not paid up, or was paid by personal notes, or by 
money borrowed of the bank itself. Note issues were often 
excessive in proportion to capital, were not protected by 
sufficient reserve or, in some cases, by any at all. Note re- 
demption was practically impossible in the case of most notes 
since they circulated far from the home of the issuing bank, 
since the banks were intentionally located in inaccessible places, 
since public opinion was hostile to redemption — especially 
when demanded by non-residents ; and since legal hindrances 
were placed in the way of such redemption. The lack of uni- 
formity of the notes and the crudeness of workmanship made 
issuing of spurious notes, counterfeiting and altering very 
general. The notes of good banks were quickly returned for 
redemption, leaving a great mass of more or less depreciated 
circulation. While banks and business men were able to some 
extent to protect themselves by bank note " Detectors " and 
" Reporters," the ordinary individual constantly suffered loss. 

c. These evils led, especially in the older states, to various 
attempts to rectify them. The Suffolk Bank of Boston brought 
New England bank notes up to par by becoming a kind of 
clearing house for the redemption of notes. Country- banks 
were individually obliged to keep a fund with the Suffolk 
for the redemption of their notes. Actually the notes of each 
bank were largely offset by the notes of other banks which it 
forwarded to the Suffolk for redemption. The banks that 
tried to resist this method of redemption were called upon to 
redeem their notes in specie at their own counters. This 
system worked successfully from 1818 to 1865. 



American Banking History. 43 

d. Another attempt at improvement was the New York 
state safety fund system which was introduced in 1829. Each 
bank was compelled to pay to the State one-half of one per 
cent, of its capital annually until a fund of three per cent, of 
its capital should be accumulated. This fund was to be used 
to make up deficiency of assets of any bank that failed and 
was, after such impairment, to be restored by further assess- 
ments upon the banks. Although the experience was not 
satisfactory, it showed that this method of protecting note 
holders would succeed if issues were registered to prevent 
over-issue ; if notes were made a first lien on assets ; if the 
safety fund was used only for the redemption of circulating 
notes; if, as soon as a bank failed, its notes might be pre- 
sented for redemption. 

e. Still another method was the special pledge system tried 
with success in New York and unsuccessfully in other states. 
Experience taught that this system would be successful only 
if the best public bonds were accepted as securities excluding 
mortgages and other kinds of securities ; and if the notes 
were registered to prevent over-issue. 

White, Money and Banking, pp. 315-356; Dewey, Financial 
History of the United States, §§ 66, 69; Hepburn, Xbra^'^i-^f for 
Sound Money, pp. 89-93, 131-139. 

3. The United States National Banic System. 

a. During the early days of the Civil War, the Secretary 
of the Treasury, Salmon P. Chase, recommended that the 
national government take charge of the bank circulation of 
the country by chartering banks which could issue notes 
secured by United States bonds. His main motive was to 
find a market for these bonds. The law establishing this 
system was passed in 1863, but thoroughly revised in 1864. 
It has since been amended frequently and at times in im- 
portant respects. In 1866 state bank notes were forced from 
circulation by a ten per cent tax. 



44 American Banking History. 

b. The Comptroller of the Currency has general charge 
of the United States banks, having authority to charter, to 
examine, to require statements of condition and in other ways 
to exercise general supervision. 

c. The capital, which must be paid promptly in cash, 
varies according to the size of the place. The nimimum for 
a town under 3,000 population is ^25,000 ; for places having 
between 3,000 and 6,000, ^50,000 ; between 6,000 and 
50,000, $100,000 ; over 50,000, $200,000. 

d The powers of these banks are limited to a strict 
banking business. They are not allowed to own real estate 
permanently except a banking house. They are subject to 
various restrictions designed to secure safety. 

e. The reserve must consist of lawful money. In cer- 
tain cities designated as reserve cities a bank's reserve must 
equal 25^ of its deposits. All other banks must keep a re- 
serve of 15^, of which three-fifths may be deposited in banks 
in reserve cities. A reserve city bank may keep one-half of 
its reserve on deposit in banks in certain designated central 
reserve cities. A 5^ fund deposited at Washington for re- 
demption of notes may be counted as part of the reserve. 
When the reserve is below the legal limit, loans may not be 
extended until it is made good. 

/. A bank may issue notes equal to the par value of bonds 
deposited by it with the Comptroller of the Currency, but 
they may not exceed in amount the market value of the 
bonds nor the capital stock paid in. Five per cent, of its 
circulation must be kept by each bank on deposit with the 
Comptroller for redemption of its notes. The notes are 
legal tender in all financial relations between the United 
States and an individual except in payment of interest on the 
debt of the United States and in payment of import duties. 
They are legal tender between national banks, but not other- 



American Banking History. 45 

wise. No notes of less than five dollars may be issued and 
only one-third of a bank's circulation maybe in that denomi- 
nation. The banks pay a small tax on circulation. Not 
more than ^3,000,000 of circulation may be retired in one 
month. 

g. The defects of the National Bank system are mainly 
connected with its circulation. Although absolutely safe, the 
bank currency is not elastic. The amount of circulation 
needed varies greatly at different times of the year largely 
because of what is required for "moving the crops." A 
good bank currency should be the element of the circulation 
capable of expansion and contraction. The bank notes as 
now issued cannot increase or decrease quickly. Many propo- 
sitions for a change of the note system have been made. At 
this time (1907) there is strong feeling in favor of allowing 
banks to issue part of their circulation without bond security 
but subject to a tax increasing as the amount of such circula- 
tion increases. The proceeds of this tax, it is further sug- 
gested, could be used as a fund for payment of the notes of 
insolvent banks. 

Dewey, Financial History of the United States, §§ 138, 139, 
163-165, 174, 200, 209; White, Money and Banking, pp. 372-384 ; 
Dunbar, Theory and History of Banking, ch. ii; Seager, Intro- 
duction, pp. 338-342; Bullock, Introduction, § 185; Hepburn, 
Contest for Sound Money , pp. 320-362. 



CHAPTER XIII. 
INTERNATIONAL EXCHANGE. 

a. Most international payments are settled by the use of 
credit instruments essentially in the same manner in which 
domestic payments are made. A in London owes X in New 
York ^1,000, and Y in New York owes B in London ;g 1,000. 
B draws a bill of exchange on Y for $1,000. A buys it of 
B and sends it to X who presents it to Y and collects the 
money. The two debts have been paid without the move- 
ment of money. 

b. Such bills when drawn upon important financial centers, 
and pre-eminently when drawn upon London, may by endorse- 
ment pass from country to country forming an international 
currency. A in London owes M in Tokio ; P in Tokio owes 
X in New York ; Y in New York owes B in London. M 
makes a draft on A and sells it to P, who by it settles his debt 
to X. X sells it to Y, who by it pays B, who collects the 
money from A. 

c. Bills of exchange are commercial or documentary if drawn 
against exports of merchandise ; financial or bankers^ if drawn 
by bankers. They are " sight " if payable on presentation ; 
and "time," if payable a certain length of time after date. 
The time bill will be lower in price than the sight bill by the 
interest for the ensuing period. 

d. The " par of exchange " between two countries is the 
expression of the value of the standard unit coin of one country 
in terms of the standard unit coin of the other. Since the 
English sovereign contains 4.866-|- as much gold as a gold 



International Exchange. 47 

dollar, the par of exchange between England and the United 
States is one pound sterling = $4,866-]-. 

e. Exchange between two countries is said to be at par 
when the amount of specie given for a bill of exchange in one 
country is exactly equal to what will be received for it in the 
other. When the obligations of a country are exactly the 
same as its claims upon foreign countries, exchange in that 
country will tend toward par, since the supply of bills at par 
will then exactly correspond with the demand at par. 

/ Since trade conditions are constantly changing, ex- 
change is rarely at par. If a country's obligations are greater 
than its claims, the demand for bills of exchange (at par) will 
be greater than the supply and they will sell at that premium 
which will cause an equilibrium. If its obligations are less 
than its claims, then correspondingly bills of exchange will 
be at a discount. 

g. The limits of these fluctuations are found in the cost 
of importing or exporting specie. The premium on bills of 
exchange cannot ordinarily go above the cost of exporting 
specie nor below the cost of importing it. These limits are 
called the "gold points." In time of great monetary strin- 
gency such normal limits may be passed. 

h. A country's balance of credit or debit (upon which the 
price of foreign exchange depends) cannot be ascertained by 
examining solely exports and imports of commodities. There 
must also be taken into account securities bought and sold, 
expenses of travellers, ocean freights, interest on obligations 
of one country held in others, commissions and any other 
items affecting balance of liability. 

i. Business is done largely upon credit ; credit depends 
largely on specie reserve ; specie reserve is affected by gold 
imports or exports ; such movements of specie depend upon 
the price of foreign exchange. The rate of foreign exchange. 



48 International Exchange. 

then, has great significance to merchants, manufacturers, 
bankers and speculators. 

Seligman, Prijiciples, § 201; Seager, Introduction, §g 205-209; 
Bullock, Introduction, pp. 268 272; 339-344; Fetter, Principles, 
pp. 485-488; Johnson, Money and Currency, pp. 85-102; Andrews, 
Institutes, %% 95, 96; Nicholson, Principles, Bk. IIl.,ch. 26; Had- 
ley, Econoniics, pp. 238-241; Scott, Money and Banking, ch. 12; 
Mill, Principles, Bk. III., ch. 20. 



CHAPTER XIV. 

ECONOMIC NATURE AND FUNCTION OF 
SPECULATION. 

a. Speculation in one form or another is a prominent fact 
in present economic life. To it are attributed many evils 
such as that it is purely gambling ; that it causes artificial 
prices and corners ; that it injures producers and investors ; 
and that the gains of speculators are mere extortion. 

b. Gambling is economically disadvantageous. This is 
not because the utility of the gain in case of success is less 
than that of the possible loss, as President Hadley says, for 
this is not true if the odds are favorable ; but because gambling 
discourages industry and social productiveness. 

,;. Insurance, on the other hand, encourages industry and 
promotes social welfare. 

d. Nearly all modern business involves speculation, since 
while goods are in process of production or sale, changes in 
price may result in great gain or loss. The manufacturer, 
the wholesale or retail merchant, the builder, the farmer, are 
speculators whether they will or not. 

e. To some extent these risks may be avoided by con- 
tracts for future delivery. At the inception of the work the 
builder or the manufacturer may contract for future delivery 
of labor or material. The manufacturer may contract to sell 
his goods and to buy his materials so as to avoid many 
uncertainties. Such arrangements, however, do not do away 
with speculation, but transfer it to a class who specialize as 
speculators. 

-nch a class to succeed must be skilled forecasters of 
futuic mand and supply. If they estimate that a certain 
commod-*'^' will in the future be lower in price than now, all 



50 Economic Nature and Function of Speculation. 

things considered, they sell for future delivery, confident that 
they will buy for even less. If they believe the price will be 
higher they buy for future delivery, confident that the future 
price will yield a profit. In each case their action tends to 
secure a greater uniformity of price over a period than would 
otherwise be found. There results a survival of a class of 
skillful speculators who estimate the course of prices with 
great accuracy. 

g. The motive of such speculators is to make a personal 
gain, and the method is practically a wager. Bu. there 
results a great social advantage. By the action of speculators 
supply tends to be equalized in time and space so that prices 
tend to be steadier. This results in securing the greatest 
possible social utility from such supply. 

h. There seems to be no easy method of distinguishing 
between good and bad speculation. Both use the same com- 
modities and the same methods. Both use largely borrowed 
money. False reports, corners, manipulation and anything 
which tends to fix prices artificially rather than to ascertain 
what they naturally tend to be, interferes with the equaliza- 
tion of supply over a given time, and consequently to result 
in an economic loss to the community. Further, the ease 
with which the business of speculation may be taken up 
entices many who overestimate their capacit\ in this direc- 
tion. That this results in economic loss is true, but specu- 
lation is, in this respect, different from other businesses only 
in degree. Further, such mistaken speculators are rapidly 
eliminated from business. 

/. It seems clear that reason and experience are against 
attempts to regulate speculation by prohibiting the sale of 
commodities for future delivery. 

Hadley, Economics, chap. 4 ; Seligman, Principles pp. 359- 
366,369; Seager, Introduction, pp. 174-T77; Fetter, Fri'^tiples, 
chap. 36 ; Emery, Speculation on the Stock and Produce Ex- 
changes of the United States. 



CHAPTER XV. 
PROTECTION AND FREE TRADE. 

I. Definition and Discrimination. 

a. Protection means "the policy of encouraging and 
developing home industries by means either of bounties paid 
to home producers or of duties imposed upon goods imported 
from abroad." 

b. Free trade means trade carried on in such way that no 
protection is afforded the home producer. Duties on com- 
modities not produced in the country are consistent with free 
trade. So are duties upon foreign commodities which are 
also produced in the country, if they are accompanied by 
equivalent excises. 

c. A tariff levied mainly for revenue may give incidental 
protection. A protective tariff may produce great revenue. 

d. An increase of the rate of the protective duty may 
lower revenue by greatly decreasing importations. 

e. The taxation of foreign goods which cannot be pro- 
duced at home encourages home industries theoretically, 
since to some extent it results in substitution in consumption 
of similar home-produced articles. 

Bullock, Introduction, §§ 238, 239. 

2. History of Governmental Relations to Foreign Trade. 

a. Under Mercantilism (15th, i6th and 17th centuries) 
governments restricted and aided trade by many methods 
and in nearly all lines. Import and export duties, bounties, 



52 Protection and Free Trade. 

navigation laws, prohibition were all used to develop a nation's 
trade and manufactures. This was largely, however, under 
the influence of the balance of trade theory. 

h. The general movement for freedom in the eighteenth 
century included a demand for greater freedom of interna- 
tional trade. Adam Smith vigorously attacked the Mercan- 
tilist system, set forth the advantages of free trade and became 
the recognized spokesman of this policy. His influence 
was far-reaching, not only upon economists, but also upon 
statesmen. 

c. Although William Pitt, the younger, revealed the influ- 
ence of Adam Smith, the first actual progress in England 
toward free trade was accomplished by Huskisson between 
1823 and 1828. In 1837 the famous anti-corn law agitation 
began, and, under the leadership of Richard Cobden and 
John Bright, continued until the repeal of the Corn laws in 
1846. The free trade policy was gradually extended until in 
1869 the present absolutely non-protective system was intro- 
duced. In the last few years a movement for protection has 
gained ground. Mr. Balfour, assenting to the superiority of 
free trade in general, doubted its wisdom for England in the 
midst of a protectionist world, and favored protection as a 
retaliatory measure and as a basis for reciprocity. Mr. 
Chamberlain, further, favored protection with reciprocal 
discriminating tariff agreements with the colonies in order to 
strengthen the Empire. But in the elections of 1906 England 
declared emphatically for continuation of free trade. 

d. The tariff policy of the United States. 

(i) The first national revenue system included a tariff law 
which, mainly designed to secure revenue, was moder- 
ately protective. Such was our national policy for 
some years. 

(2) From 1807 to 181 5 the Embargo, the Non-intercourse 
Act and war cut off foreign commerce, turned the de- 



Protection and Free Trade. 53 

mand for certain products toward the home producer 
and acted as extreme protection. When these condi- 
tions passed away the protected home producer, suddenly- 
exposed to the full force of foreign competition, secured 
in 1816 the first distinctly protective tariff. 

(3) Laws passed in 1832 and 1833 provided for reduction 
and then a gradual decrease of duties. Although in- 
creased duties were imposed in 1842, the act of 1846 
again provided for low rates. So satisfactory were the 
results of low tariff that in 1857 a further reduction was 
made. 

(4) For revenue reasons high duties were imposed during 
the Civil War. Incidentally, these duties involved 
heavy protection. Industries that thus came to be de- 
dependent on protection were unwilling to dispense with 
it, when after the War the urgent need of revenues there- 
from had passed away. The political weakness of the 
South (where low tariff views had prevailed) and the 
growing political strength of the industrial regions 
favored a continuation of the high war tariff. 

(5) At times agitation for revision of the tariff was active, 
but the changes made were insignificant. President 
Cleveland's famous tariff message in 1887 made the 
tariff again a live political issue, but a Republican Senate 
prevented change. On the contrary, a Republican vic- 
tory in the elections contested over this question, led to 
the passage of the very highly protective McKinley act 
in 1890. 

(6) The popular discontent with this act soon placed 
the Democrats in full control, and in 1894 the Wilson- 
Gorman act was passed and became law without the 
President's signature. This measure (a compromise and 
badly devised) was highly protective and did not fairly 
represent the policy of tariff-reduction. Unsatisfactory 
to nearly all, it was short lived. 



54 Protection and Free Trade. 

(7) In 1897 the Dingley act introduced the most highly- 
protective system the country has known. It is still in 
force (1907). There has been even among protec- 
tionists some reaction against extreme protection. Mr. 
Blaine and President McKinley declared for reciprocity. 
Because of local industrial conditions or because of 
antipathy to the protected trusts, the revisionist tendency 
has at times been marked. 
e. The general expectation in the middle of the nine- 
teenth century that the contemporary tendency toward free 
trade would continue, was mistaken. France, Germany, 
Italy, and, in fact, practically all countries maintain high 
protection. 

Seligman, Principles, % 202; Dewey, Fi^iancial History of the 
United States, %% 35. 36, 73, 78-84, 102. 107. 113, 114, 119, 127, 128, 
167, 180, 181, 187, 192, 196; Gide, Principles, pp. 310-318; Pal- 
grave, Dictionary of Political Economy, vol. II, p. 148, article 
Free Trade, Modern History of; The Americana article on Free 
Trade. 

3. Some General Controversial Considerations. 

a. There is much fallacious argument on both sides based 
on alleged results. Post ergo propter. Countries have pros- 
pered under each system. The United States was very 
flourishing under low tariff from 1846 to 1861, and under 
high tariff from 1897 to 1907. Panics occurred under low 
tariff in 1847 and 1857, and under high tariff in 1873 and 
1884-6. 

b. Many forces affect a country's prosperity — natural re- 
sources, human efficiency, education, wars, forms of social 
organization. It is, then, difficult to trace the exact in- 
fluence of free trade or protection. The results of each are 
undoubtedly often much exaggerated. 

c. The free trader in asserting, as he sometimes does, 
that the government cannot tax one for the benefit of another, 
misrepresents the protectionist attitude, for protection claims 



Protection and Free Trade. 55 

that it benefits all. The free trader, frequently, also demands 
a more extreme application of latssez /aire than is in har- 
mony with modern thought and practice as to the relation of 
government to industry. 

d. On the other hand, the actual establishment of a new 
industry by protection does not necessarily justify it. Almost 
any industry might be established in almost any country by 
protection ; but it might be at too great cost. 

e. We cannot settle this controversy by regarding the 
consumer alone as does the free trader often ; nor by regard- 
ing the effect on a few producers as does the protectionist. 

For references see end of the chapter. 

4. The Argument for Protection. 

a. The "balance of trade " argument emphasizes the de- 
sirability of securing a large share of the precious metals by 
discouraging imports and encouraging exports of commo- 
dities. A favorable balance of trade will result in an import 
of money, and thus a nation will get wealthy. Intelligent 
protectionists no longer use this argument. 

b. For a long period the ' ' home market ' ' argument was 
influential in the United States. It was " thought to reconcile 
the interests of the agricultural South and West with those of 
the manufacturing North. It rested upon the proposition 
that the prosperity of the American farmer depends upon a 
regular and constant market for his products, and that such 
a market is to be obtained only by building up manufacturing 
centers within the country." (Seager. ) 

c. The " infant industry " argument asserts that a country 
well fitted in natural resources and in the character of its 
people to carry on a certain industry, may not be able to 
establish it without protection because of the competition of 
other nations in which the industry has long been carried on. 
A temporary burden upon the consumer is justified because 



56 Protection and Free Trade. 

of the later results. Competition within the country will 
eventually reduce prices. 

Friedrich List, a German Economist (19th century), 
asserted that the industrial development of a country includes 
five stages ; hunting and fishing, pastoral life, agriculture, 
manufacture for home supply, manufacture for export. In 
the case of some nations this evolution is checked in the 
transition from the agricultural stage by competition of 
nations that have progressed further. Hence, said List, 
temporary protection is necessary to enable a country to pass 
from the agricultural to the manufacturing stage. 

d. The " wages argument " for protection has taken two 
phases in the United States. Early in our history, protection 
was said to be necessary to overcome the disadvantage of the 
American manufacturer due to the high wages he must pay. 
Later it was asserted that wages had become high because of 
protection. Now the two are advanced together ; wages are 
high because of protection and we must continue protection 
in order to overcome the industrial disadvantage of high cost 
due to high wages. 

e. The advantages of "diversified industries" have re- 
cently been emphasized. A well-rounded economic develop- 
ment with different kinds of occupations is necessary to 
social progress. Without protection a country may be one- 
sided in its development with an undue tendency toward 
agriculture or manufacturing, resulting possibly in early 
exhaustion of some kinds of natural resources. Diversified 
industries, says the protectionist, securing "a more efiicient 
utilization of labor and capital and a help to enterprise, will 
result in higher wages as well as greater profits, a better 
standard of life for the workman and a more prosperous condi- 
tion for the manufacturer." 

/. It is sometimes said that by protection a country may 
make foreigners pay its taxes. The imposition of the 



Protection and Free Trade. 57 

pro-protective duty will compel the foreign manufacturer to 
reduce his price in order to retain his market in the taxing 
country. With slight or even no increase in price to the 
domestic consumer, the government gets its revenues at the 
expense of the foreigner. 

g. In order to be independent of other nations in time 
of war a country should establish by protection those indus- 
tries producing necessities of existence and war materials. 

For references see end of the chapter. 

5. The Argument for Free Trade. 

a. Against the ' ' balance of trade ' ' argument it is said 
that wealth does not consist of money only; that an excessive 
stock of money, if it could be secured in this way, would so 
affect prices as to stimulate imports and discourage exports ; 
that imports must in the long run pay for exports; and that 
international movements of money depend not upon relation 
of exports of commodities to imports of commodities, but of 
total credits to total liabilities. 

d. Against the '' home market " argument it is claimed 
that the home market is no steadier than the foreign ; that 
the development of transportation has decreased the cost of 
moving goods ; and that the need of the United States at 
present is foreign markets. 

c. The ' ' infant industry ' ' argument is held to have little 
weight now, since we are able to compete with the world in 
nearly every line of manufacture and have passed from an 
agricultural economy. Further, it is said that "infant in- 
dustries ' ' never are willing to dispense with that aid which 
was designed to be temporary ; that while admittedly pro- 
tection should be granted only to those industries which are 
quite sure to succeed ultimately, this aid is applied generally 
and without discrimination ; and that the protection of agri- 
cultural industries is not consistent with this theory. More- 



58 Protection and Free Trade. 

over, as evidence that industries can and do develope with- 
out protection, emphasis is placed on the development of 
manufactures in the newer parts of the United States, in spite 
of the competition of the older manufacturing regions within 
the country. 

d. The free trader asserts that wages are fixed by produc- 
tivity and little dependent upon the tariff. He calls attention 
to the fact that wages in the United States, because of the high 
level of productivity, have always been high in unprotected as 
well as in protected industries and that protected laborers are 
itvi as compared with the unprotected. High wages do not 
necessarily mean high cost, but frequently low cost. Com- 
parative costs rather than comparative wages determine ability 
of manufacturers to compete with those of other nations. 
While the withdrawal of protection might destroy certain 
industries, the level of general wages would not fall after 
readjustment had taken place. Wages are low in Russia and 
Germany, although these countries are strongly protectionist. 
Further the free trader asserts that protection, by interfering 
with the most natural and efficient production, actually tends 
to make wages lower than they would otherwise be. 

e. The free trader, while not denying that diversification 
of industries is desirable, contends that it may be secured at 
too great cost ; that much diversification is inevitable in every 
country ; that in the United States we cannot fail to have 
great diversification because of the variety of climate and 
resources ; and that infinite wisdom and foresight are neces- 
sary to secure a proper diversification artificially. Natural 
development is safer. 

f. To make the foreigner pay our taxes is unethical ; and 
is possible only in a few cases. Moreover the foreigner can, 
if this argument be sound, make us pay his taxes. 



Protection and Free Trade. 59 

g-. The military argument may have some weight for other 
countries, but little for the United States, because we produce 
nearly all necessaries. 

/i. More positively, the free trader asserts that freedom of 
international trade, like freedom of internal trade, increases 
production of wealth by bringing about the " most efficient 
utilization of economic forces. " " The freer the conditions 
of exchange the more highly will the division of labor be 
developed. Difference in the productive capacities of dif- 
ferent countries fit some to produce some things, others, 
others. If free trade is permitted .... the conse- 
quence will be a larger joint produce and a larger share of 
wealth for each country." (Seager.) 

t. Protection, if effective, increases prices, burdens the 
consumer and is class legislation. 

J. By increasing the cost of raw material protection in- 
jures many manufacturing industries. This argument has 
been advanced vigorously in some parts of the United States 
recently. Our export trade is injured by taxing raw materials. 

Jk. Protection leads to the exhaustion of raw materials. 

/. Protection involves business uncertainty. 

m. Protection leads to political corruption, undue in- 
fluence from protected interests on political parties and legis- 
lation, and log-rolling. Campaign funds are supplied by pro- 
tected parties. 

n. While theoretically there is much to be said for pro- 
tection (especially in connection with nascent industries) if 
designed by a judicious, disinterested and exceedingly wise 
authority, actual conditions and practical experience condemn 
it. 

For references see end of the chapter. 
6. Conclusion. 

a. With much strength and much weakness in the argu- 
ment on each side it is not strange that both popular and 



6o Protection and Free Trade. 

expert opinion should be divided. Each must form his own 
conclusions. 

b. However, the one who accepts the conclusions of the 
free trader must remember that, in the United States, our 
whole industrial and commercial system is adjusted to pro- 
tection. Progress toward free trade, if it be desirable, must 
be gradual, discriminating and mindful of actual conditions. 

c. On the other hand the protectionist should remember 
that there is little argumentative support for continuous and 
universal protection. Hence no particular tariff is permanent 
and sacred. Changing conditions require frequent revision. 

Seligman, Prhiciples, §§ 203-205; Seager, l7itroduction , §§ 210- 
216; and his article on Protection in International Encyclopcedia; 
Bullock, Introduction, pp. 355-373; Hadley, Economics, §§ 466- 
488; Fetter, Principles, ch. 51; Gide, Principles -p-^. 318-346; An- 
drews, Institutes, %% 56-60; Mill, Principles, Bk. V., ch. x. , § i. 



LEAp'08 



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